UNIVERSITY 

OF  CALIFORNIA 

LOS  ANGELES 


SCHOOL  OF  LAW 
LIBRARY 


PRINCIPLES    AND    METHODS    OF 
TAXATION 


PRINCIPLES 
METHODS  OF  TAXTON 


BY  G.    ARMITAGE-SMITH,   M.A. 

<n 

PRINCIPAL   OF   THE   BIRKBECK   COLLEGE 


NEW   YORK 
E.    P.   BUTTON    &   COMPANY 

1906 


T 


[Printed  in  Great  Britain."} 


PREFACE 

THE  object  of  this  work  is  to  present  in  a  concise  and 
simple  form  an  account  of  the  British  system  of 
taxation  and  the  principles  on  which  it  is  based, 
together  with  some  of  the  leading  historical  facts  in 
its  evolution.  Taxation  is  a  complex  subject,  and  one 
on  which  there  is  no  perfect  consensus  of  opinion. 
The  present  aim,  however,  and  the  condensation 
imposed  by  limits  of  space,  preclude  minute  discus- 
sions on  controversial  points,  so  that,  for  the  most 
part,  broad  principles  and  general  tendencies  alone  are 
stated. 

It  is  hoped,  however,  that  the  outline  here  offered 
will  serve  a  useful  purpose ;  it  may  meet  the  wants 
of  many  citizens,  with  limited  leisure,  who  would 
not  be  tempted  to  make  a  study  of  taxation  in 
systematic  works  on  economics,  and  who  yet  desire 
some  theoretic  knowledge  of  a  subject  which  touches 
them  so  closely.  Possibly  some  of  these  readers  may 
be  induced  to  pursue  the  investigation  in  the  more 


vi  PREFACE 

extensive  and  erudite  treatises  of  Bastable,  Dowells 
Seligman,  Nicholson,  and  other  modern  writers  on 
taxation,  as  also  in  the  classic  works  of  Adam 
Smith,  Ricardo,  and  Mill,  to  all  of  which  I  have  to 
express  my  indebtedness.  I  am  under  special  obliga- 
tion to  my  friend  Mr  H.  J.  Tozer,  M.A.,  who  has  read 
through  all  the  proofs  and  has  contributed  many 
valuable  suggestions. 

G.  A.-S. 

LONDON,  February  1906. 


CONTENTS 

CHAP.                                                                                             .  PAGE 

I.   THE  GROUNDS  AND  NATURE  OF  PUBLIC  EXPENDITURE  I 

II.   SOURCES  OF   IMPERIAL    REVENUE,  AND   THEORIES    OF 

TAXATION 21 

III.  PRINCIPLES  OF  TAXATION 33 

IV.  DIRECT  TAXATION— TAXES  ON  PROPERTY  AND  INCOME  56 

V.   INDIRECT   TAXATION — TAXES     ON    COMMODITIES    AND 

ACTS 76 

VI.   INCIDENCE  OF  TAXATION IO3 

VII.   NATIONAL  DEBTS I2O 

VIII.   SOME  -OTHER  REVENUE  SYSTEMS  .  .  .          .141 

IX.   LOCAL  TAXATION 159 

EXTRACT    FROM    REPORT  OF    ROYAL   COMMISSION    ON 

LOCAL  TAXATION 185 

LOCAL  TAXATION,    1902-3 189 

BOOKS  OF  REFERENCE 19! 

REPORTS 192 

INDEX 193 


PRINCIPLES    AND    METHODS 
OF    TAXATION 

CHAPTER   I 

THE  GROUNDS  AND  NATURE  OF  PUBLIC  EXPENDITURE 

TAXES  are  a  portion  of  private  wealth,  exacted  from 
individuals  by  the  State  for  the  purpose  of  meeting 
the  expenditure  essential  to  carrying  out  the  functions 
of  government.  Taxation  in  some  form  is  an  invariable 
attribute  of  an  organised  political  society,  and,  under 
whatever  name  it  exists,  it  becomes  sooner  or  later  the 
principal  means  of  raising  revenue  for  public  purposes  ; 
it  is  thus  the  correlative  to  the  services  which  govern- 
ment performs  for  the  community.  Acting  under  a 
natural  impulse  men  organise  themselves  into  political 
societies  for  common  safety  and  to  secure  the  advan- 
tages which  arise  from  combination ;  only  by  such 
union  is  the  development  of  human  powers  possible  or 
progress  in  civilisation  attainable.  All  organisation 
implies  administration,  and  this  involves  expenditure 
which  must  be  met  by  public  income. 

Economic  separation  of  functions  tends  to  increase 
with  the  complexity  of  society,  and  the  more  advanced 
the  organisation,  the  more  numerous  become  the  duties 

»*  A 


NATURE   OF   PUBLIC   EXPENDITURE    [CHAP. 

of  government,  the  more  elaborate  and  costly  its 
machinery,  and  the  larger  the  common  fund  requisite 
to  meet  expenditure  incurred  for  the  common  good. 

The  investigation  into  the  nature  and  principles  of 
State  expenditure  and  State  revenue  is  called  Public 
Finance — a  science  which  involves  considerations  of 
both  a  political  and  an  economic  character.  As  in  all 
other  cases  of  organised  knowledge  empirical  methods 
preceded  theory,  so  societies  had  reached  a  fairly 
advanced  stage  before  a  science  of  finance  arose,  and 
in  practice  public  finance  took  many  forms  before 
principles  were  formulated  or  even  sought  out ;  the 
fiscal  needs  of  earlier  times  were  met  by  measures  of 
a  more  or  less  arbitrary  kind  determined  by  the  form 
of  government,  the  degree  of  knowledge,  and  the 
nature  of  the  local  circumstances  ;  only  gradually  and 
in  the  more  progressive  countries  under  settled  govern- 
ment have  systematised  ideas  as  to  principles  of  finance 
gained  general  acceptance.  Modern  highly  developed 
communities  profess  to  seek  for  guidance  in  matters 
relating  to  public  expenditure  from  maxims  of  a 
scientific  character,  and  to  regulate  their  taxation  in 
conformity  with  principles  which  are  recognised  as 
working  out  beneficially  in  the  circumstances  that 
govern  their  economic  and  political  existence. 

In  England,  from  the  sixteenth  century,  economic 
enquiry  began  to  take  scientific  form,  but  rather  as 
a  series  of  problems  of  trade,  currency,  and  finance, 
than  an  investigation  into  production  and  distribution. 
Towards  the  end  of  the  eighteenth  century,  Adam 
Smith  gave  organic  structure  to  economics  as  "an 
enquiry  into  the  causes  and  nature  of  the  wealth 
of  nations,  including  an  enquiry  into  the  sources 

2 


i.]  STATE   EXPENDITURE 

of  revenue  of  the  sovereign  or  commonwealth " ;  a 
considerable  section  of  this  classic  treatise  is  thus 
concerned  with  taxation  and  its  effects.  It  is  only, 
however,  in  recent  times  that  the  systematised  study 
of  finance  has  come  into  prominence.  Professor 
Bastable's  "Public  Finance,"  published  in  1892,  was 
the  first  exhaustive  attempt  in  England  to  treat  the 
subject  as  a  specific  science,  although  in  Germany 
much  labour  had  already  been  devoted  to  the  enquiry. 

The  present  aim  is  to  give  an  outline  of  the  British 
system  of  taxation  with  an  examination  of  the  principles 
on  which  it  is  based,  and  to  describe  the  general 
incidence  and  economic  results  of  the  various  forms 
of  taxation.  A  preliminary  survey  of  the  nature  of 
the  public  expenditure  which  constitutes  the  demand 
for  public  revenue  will  form  an  appropriate  introduction 
to  this  undertaking. 

It  has  been  held,  and  from  one  point  of  view  the 
doctrine  is  valid,  that  State  expenditure  should  be 
determined  in  amount  by  State  revenue,  just  as  the 
income  of  a  private  individual  should  dictate  the 
scale  of  his  consumption ;  in  national  affairs,  however, 
this  process  is  generally  reversed,  and  State  income  is 
largely  determined  by  considerations  as  to  necessary 
outlay  ;  measures  involving  public  expenditure  are  often 
urgent,  and  are  accepted  as  needful  and  unavoidable, 
and  to  meet  these  revenue  has  to  be  found.  Recourse 
in  such  circumstances  is  sometimes  made  to  loans — a 
method  open  to  abuse,  and  now  adopted  so  frequently, 
especially  in  local  affairs,  as  to  afford  ground  for  serious 
consideration  ;  for  debt  implies  merely  deferred  taxation 
with  interest.  In  national  affairs  the  power  to  spend 
and  the  need  for  spending  have  to  be  considered 

3 


NATURE   OF   PUBLIC   EXPENDITURE    [CHAP. 

together  ;  they  interact,  and  thus  mutually  determine  the 
actual  expenditure  for  which  revenue  must  be  provided. 

Taxes  are  contributions  from  the  national  dividend  ; 
they  must  ultimately  come  out  of  the  annual  earnings 
of  the  nation.  The  private  income  of  a  nation  is  the 
index  of  the  capacity  of  the  people  to  pay  taxes,  since 
it  is  the  real  source  of  public  revenue.  Labour  and 
wealth  employed  productively  by  individuals  create  a 
fund  which  can  be  drawn  upon  ;  hence,  as  Adam  Smith 
urged,  the  importance  of  measures  which  remove 
restraints  on  production,  and  which  tend  to  stimulate 
the  enterprise  of  a  people. 

Public  expenditure  can  be  roughly  classed  under  two 
heads,  imperial  and  local ;  the  first  concerns  the  com- 
munity as  a  whole,  the  second  relates  to  matters  which 
have  a  special  local  interest ;  the  army  and  navy 
illustrate  the  former,  sanitation  and  street  lighting  the 
latter.  Many  matters,  however,  have  both  an  imperial 
and  a  local  significance,  and  in  these  cases  a  judicious 
combination  of  central  and  local  control  is  desirable  ; 
the  British  poor  law  and  elementary  education  illustrate 
this  blending  of  national  and  local  interests.  The 
State  contributes  largely  to  public  education ;  local 
rates  are  also  called  upon  for  the  same  purpose,  and 
to  local  authorities  have  been  delegated  the  duties  of 
enforcing  and  administering  the  Education  Acts.  Poor 
law  relief,  which  was  originally  under  local  control, 
has,  since  1834,  been  regulated  by  the  Government, 
but  the  administration  is  local,  and  the  expenditure 
is  governed  by  local  circumstances,  and  falls  mainly 
upon  local  rates,  though  the  Government  also  makes 
contributions  from  imperial  taxation  towards  the 
expense. 

4 


i.]  IMPERIAL  AND   LOCAL   CONTROL 

During  the  growth  and  consolidation  of  the  nation, 
two  tendencies  have  been  evolved  as  regards  the 
functions  of  government,  one  making  for  centralisa- 
tion, and  the  other  for  devolution.  The  former 
has  tended  to  unification,  simplicity,  homogeneity  of 
management,  and  economy ;  it  has  superseded  diversity 
of  authority  and  also  of  method  in  cases  where  unity 
was  desirable.  The  other  has  made  for  the  delega- 
tion of  administration  to  local  authorities  where  local 
interests  were  mainly  concerned.  Local  government 
is  in  the  latter  case  deemed  the  more  efficient,  since 
it  can  fully  avail  itself  of  local  knowledge  and  super- 
vision, and  can  better  deal  with  special  local  circum- 
stances and  wants,  such  as  arise  from  a  diversity  of 
industrial  and  commercial  conditions  in  which  elasticity 
of  method  is  desirable.  Further,  local  government  is 
educative ;  it  fosters  interest  and  calls  forth  local 
sentiment ;  it  can  utilise  the  detailed  knowledge  and 
the  administrative  capacity  of  a  larger  number  of  the 
community,  and  it  enlists  the  sympathy  and  activity 
of  many  who  are  able  and  willing  to  give  their  service 
and  knowledge  locally,  but  who  would  find  no  scope  for 
their  public  zeal  and  social  sentiment  under  a  system 
of  centralised  administration.  The  State  in  such 
cases  retains  some  control  over  the  local  authorities, 
and  can  restrain  their  action,  e.g.,  in  the  sanctioning  of 
loans  for  local  expenditure ;  it  also  forms  a  court  of 
appeal  against  extravagance  or  any  abuse  of  power 
on  the  part  of  local  authorities. 

On  the  threshold  of  the  subject  two  fundamental 
problems  present  themselves,  as  regards  both  imperial 
and  local  expenditure  :  (i)  what  are  the  proper  subjects 
for  such  expenditure ;  (2)  what  are  the  methods  by 

5 


NATURE   OF   PUBLIC   EXPENDITURE    [CHAP. 

which  funds  are  to  be  obtained,  and,  as  a  corollary  to 
these,  on  what  principles  should  taxation  be  based. 

The  proper  scope  of  State  action  is  one  of  the 
standing  problems  of  political  philosophy.  Historically 
the  functions  of  the  State  have  in  practice  fluctuated 
between  two  extremes,  and  their  exact  limits  remain 
still  indeterminate.  The  one  extreme  view  (socialistic) 
would  comprise  the  whole  domain  of  economic  action  ; 
the  other,  commonly  called  laisser  faire,  would  confine 
the  influence  of  government  to  the  narrowest  limits 
possible.  The  normal  tendency  in  advanced  countries 
has  been  towards  free  contract,  but  with  many  State 
limitations. 

For  centuries  in  England  the  sovereign  power  exer- 
cised over  the  individual  a  customary  control  which 
savoured  of  bondage  in  social  and  economic  affairs ; 
service  and  taxation  had  something  of  an  arbitrary 
character ;  labour,  industry,  and  trade  were  fettered 
by  numerous  restraints,  and  political  freedom  for  the 
many  had  scarcely  any  existence.  At  length  by 
sharp  conflicts  political  freedom  was  acquired,  and 
personal  and  economic  liberty  gradually  followed. 
The  rights  of  free  contract,  voluntary  combination,  and 
free-trading  were,  however,  slow  in  attainment. 

In  the  seventeenth  century  the  idea  of  State  direc- 
tion and  regulation  was  a  leading  principle  in  commerce, 
and  it  was  embodied  in  what  is  now  known  as 
the  mercantile  system.  A  reaction  took  place  in  the 
eighteenth  century  under  the  teaching  of  the  Physiocrats, 
and  especially  through  the  influence  of  the  doctrine 
of  "  natural  liberty "  then  advocated  and  applied  to 
economic  considerations.  Adam  Smith,  the  champion 
of  economic  freedom  in  Great  Britain,  however,  rather 

6 


i.]  FUNCTIONS   OF   GOVERNMENT 

attacked  definite  injurious  restraints  on  economic 
liberty  than  advocated  a  thorough  laisser  faire  system. 
He  sets  forth  the  politico-economic  duties  of  govern- 
ment as  threefold  :  (i)  "  the  protection  of  society  from 
the  violence  and  invasion  of  other  independent  societies  "  ; 
(2)  "  the  protection  as  far  as  possible  of  every  member 
of  society  from  the  injustice  or  oppression  of  every 
other  member  of  it,  or  the  duty  of  establishing  an 
exact  administration  of  justice ; "  (3)  "  the  duty  of 
erecting  and  maintaining  those  public  institutions 
and  those  public  works  which,  though  they  may  be 
in  the  highest  degree  advantageous  to  a  great  society, 
are,  however,  of  such  a  nature  that  the  profit  could 
never  repay  the  expense  to  any  individual  or  small 
number  of  individuals." 

More  recent  classifications  are  little  more  than 
refinements  upon  and  restatements  of  that  of  Adam 
Smith.  For  example,  J.  S.  Mill  divided  the  functions 
of  government  into  "  necessary  "  and  "  optional."  The 
first  comprised  security  of  life  and  property  and  defence 
against  both  foreign  and  domestic  enemies,  which 
practically  coincide  with  the  first  two  duties  set  forth 
by  Adam  Smith.  The  boundary  of  the  optional  field 
Mill  admitted  to  be  very  elastic  and  undefined,  and 
to  be  determined  in  different  circumstances  by  the 
principle  of  expediency ;  each  case  of  State  interference 
must  be  justified  on  its  merits  as  a  public  benefit,  and 
as  the  best  means  of  obtaining  some  end  deemed 
desirable  for  the  community. 

Later  socialistic  conceptions  of  the  State  led  to  the 
revival  of  the  idea  of  paternal  rule  and  a  tendency 
to  regard  the  State  as  the  chief  force  in  expanding 
and  consolidating  national  life.  The  adoption  of  this 


NATURE   OF   PUBLIC   EXPENDITURE    [CHAP- 

doctrine  would  obviously  involve  a  very  large  increase 
in  taxation.  But  the  economic  and  industrial  conditions 
of  nations  vary  greatly ;  different  circumstances  and 
different  stages  of  evolution  call  for  various  degrees  of 
departure  from  the  principle  of  non-interference,  which 
may  be  adopted  as  the  normal  principle.  This  remark 
is  illustrated  by  the  contrast  between  British  rule  in 
Great  Britain  and  in  India ;  many  duties  must  be 
undertaken  by  the  ruling  power  in  India,  which  are 
accomplished  by  voluntary  enterprise  in  Great  Britain. 
Similar  deviations  from  the  principle  of  free  enterprise 
are  observable  under  different  civilisations,  and  under 
the  diverse  forms  of  distribution  of  political  power  in 
various  countries.  Among  barbarous  nations  there  is 
little  organisation  or  combination,  and  no  system  of 
taxation  except  in  the  form  of  obedience  and  service 
to  the  chief.  Under  feudal  government  the  various 
grades  of  society  were  bound  together  by  a  system  of 
land  tenure  in  which  military  service,  labour  dues  or 
customary  payments,  were  exacted  from  all  classes  in 
some  form.  In  course  of  time  with  economic  develop- 
ment service  was  commuted  to  money  payment,  and  by 
degrees  taxation  in  some  more  or  less  arbitrary  form 
appeared  ;  it  was  long,  however,  before  it  was  reduced 
to  definite  principles  and  methods. 

In  the  Middle  Ages  much  public  expenditure  was 
incurred  for  purposes  of  war  and  religion  :  these  called 
for  both  personal  service  and  contributions  of  wealth. 
As  commerce,  trade,  and  industry  increased,  greater 
prominence  was  given  to  the  economic  aspects  of 
society  ;  problems  relating  to  the  functions  and  limits 
of  State  control  and  direction  became  more  numerous ; 
and  while  old  restraints  were  being  removed,  new  forms 

8 


i.]  STATE    REGULATION 

of  State  intervention  were  called  into  existence.  Thus, 
e.g.,  Combination  Acts  were  repealed,  while  Factory, 
Mines,  and  Workshops  Acts  were  passed. 

The  utilitarian  view  of  expediency  as  the  decisive 
test  of  government  regulation  seems  to  permit  the 
indefinite  application  of  State  intervention,  provided 
it  can  be  shown  that  the  general  welfare  can  only  thus 
be  best  attained ;  the  onus  of  proof,  however,  rests 
always  with  the  advocates  of  new  modes  of  interfer- 
ence, which  require  additional  expenditure  and  make 
a  demand  for  further  taxation.  Scientific  knowledge, 
which  has  extended  human  powers  over  nature,  has 
increased  the  variety  of  operations  and  products,  and 
has  created  elaborate  industries  employing  complex 
machinery.  This  evolution  has  necessitated  fresh 
regulations  by  the  State,  in  order  to  prevent  injury  to 
workers  who  are  liable  to  suffer  under  the  new  industrial 
system.  It  has  also  become  necessary  for  the  State 
to  protect  the  public  against  abuses  of  power  by 
special  interests  and  monopolies.  Increased  public 
expenditure  is  a  result ;  this  is  exemplified  in  national 
outlay  on  police,  education,  regulations  touching  trade, 
railways,  and  shipping,  and  inspection  of  many  kinds, 
both  national  and  municipal. 

The  determining  principle  in  the  case  of  both  imperial 
and  local  expenditure  is  admittedly  the  supply  of  some 
service  necessary  or  desirable,  and  able  to  be  more 
efficiently  provided  by  public  action  than  by  private 
enterprise.  While  there  is  scope  for  much  elasticity 
in  the  application  of  this  principle,  in  determining 
the  field  of  its  activities  it  is  important  that  govern- 
ment, whether  local  or  imperial,  should  not  restrain 
that  individual  freedom,  which,  by  fostering  energy, 

9  B 


NATURE   OF   PUBLIC   EXPENDITURE    [CHAP. 

enterprise,  and  invention,  becomes  the  prime  factor  in 
all  progress.  On  the  other  hand,  since  progress 
depends  also  upon  safety  and  knowledge,  the  State 
should  secure  that  these  conditions  of  national  develop- 
ment are  provided. 

Some  kinds  of  public  expenditure  are  called  un- 
remunerative  or  non-productive,  because  they  do  not 
yield  any  apparent  addition  to  material  wealth;  such 
expenditure  may,  however,  be  unavoidable,  as  in  the 
examples  of  military  defence  and  police,  which  are 
rendered  necessary  by  the  jealousies  of  other  nations 
and  the  conditions  of  morality  at  home.  The  standing 
armies  of  Europe  alone  cost  vast  sums  annually,  apart 
from  the  indirect  losses  to  industry  arising  from  the 
withdrawal  of  able-bodied  men  from  industrial  employ- 
ment. Viewed  from  the  economic  standpoint  only, 
this  expenditure  would  not  be  regarded  as  productive. 
Other  expenditure  is  called  productive  or  beneficial, 
because  it  returns  interest  on  capital,  or  affords  some 
very  obvious  economic  service  ;  such  expenditure  may 
be  regarded  as  capital  sunk  in  the  common  interest, 
and  is  exemplified  by  outlay  on  roads,  harbours,  docks, 
and  waterworks.  In  these  undertakings  there  is  a 
tangible  or  visible  result,  something  which  supplies  a 
definite  economic  good,  or  which  yields  a  revenue.  The 
term  productive  is,  however,  incapable  of  clear  definition 
on  these  lines ;  some  expenditure  is  less  obviously 
productive  in  its  immediate  results,  but  is  not  less 
economic  in  its  ultimate  effects  ;  such  is  the  expenditure 
upon  public  education,  which  may  increase  the  pro- 
ductive power  of  a  nation  in  an  incalculable  degree. 
Again,  a  war  of  defence  may  be  necessary  to  preserve 
the  very  existence  of  an  industrial  people;  its  results 


i.]         PUBLIC   EXPENDITURE   FOR  DEFENCE 

are  an  asset  incapable  of  economic  valuation,  the  service 
cannot  be  weighed  against  the  cost.  Much  economic 
loss  arises  from  defects  in  human  nature  ;  these  must 
be  reckoned  among  the  data  of  the  problem,  and  they 
render  employments  such  as  those  of  the  army,  navy, 
and  police,  necessary. 

It  may  be  urged  that  some  economic  advantages 
are  gained  by  military  training,  and  it  is  admitted  that 
the  virtues  of  patriotism,  courage,  self-sacrifice  are 
called  forth  by  war ;  but  the  net  economic  outcome 
of  militarism  is  waste,  and  those  same  virtues  can  be 
promoted  and  displayed  in  other  circumstances.  As 
regards  the  inventive  power  said  to  be  stimulated  by 
war,  the  same  originality  of  genius  could  find  a  vent 
and  more  valuable  employment  in  peaceful  pursuits 
which  add  to  production,  remove  pain,  ease  labour, 
and  promote  comfort.  To  the  immediate  taxation  for 
war  and  preparation  for  defence  must  be  added  the 
debts  incurred,  which  become  a  permanent  burden 
on  the  industry  of  the  nation.  The  conclusion  is  that 
while  some  degree  of  naval  and  military  expenditure 
is  inevitable  in  the  existing  relations  of  nations  owing 
to  inherent  defects  in  the  character  of  men,  it  is  to  be 
deplored  that  this  kind  of  expenditure  tends  to  grow 
with  accelerating  pace  and  to  absorb  an  ever  increasing 
proportion  of  national  revenue.1 

Public  expenditure  is  not  restrained  by  the  forces 
which  control  private  expenditure ;  the  degree  of 

1  The  military  defences  of  the  great  powers  of  Europe  on  a 
peace  basis  cost  those  nations  more  than  ,£250,000,000  a  year,  and 
this  is  enormously  increased  by  periodic  outbreaks  of  war.  Further 
increase  of  expenditure  upon  military  or  naval  equipment  by  one 
power  invariably  evokes  rivalry  among  others. 

ii 


NATURE   OF   PUBLIC   EXPENDITURE    [CHAP. 

taxation  is  limited  only  by  the  estimate  of  its  necessity 
and  the  capacity  and  willingness  of  the  people  to  bear 
it.  The  Government  must  consider  the  effect  of  taxa- 
tion upon  the  industry  of  the  people  and  on  their 
power  to  pay.  Anything  which  encroaches  upon  these 
unduly  inflicts  a  double  injury,  inasmuch  as  it  reduces 
the  standard  of  living  and  threatens  to  sap  the  economic 
forces  of  the  nation. 

Public  expenditure,  both  national  and  local,  is  liable 
to  sundry  defects ;  in  some  cases  the  influence  of 
private  individuals  procures  outlay  upon  measures 
which  are  unproductive  and  do  not  really  tend  to 
public  advantage ;  also  the  motives  to  economy  in 
administration  are  not  so  urgent  as  in  a  private  business, 
for  those  who  direct  public  expenditure  do  not  feel 
the  same  responsibility  as  those  who  are  dealing 
with  their  own  capital,  since  they  do  not  personally 
suffer  the  penalties  of  waste ;  tax-payers  cannot  select 
all  their  employees  or  secure  their  full  efficiency,  nor 
can  they  readily  change  their  methods  of  expenditure 
when  these  are  established,  or  effectively  control  the 
machinery  when  once  it  is  set  up.  State  production 
has  also  a  tendency  to  check  private  enterprise ;  it 
weakens  competition,  establishes  routine  systems,  and 
discourages  the  introduction  of  new  and  more  economic 
methods.  The  invigorating  stimulus  of  competition 
and  personal  interest  seems  to  be  essential  for  progress. 

Private  enterprise  seeks  to  increase  wealth  as  a 
source  of  profit,  and  its  expenditure  is  regulated  by 
its  income.  In  the  case  of  the  State  the  revenue 
demand  is  fixed  by  the  amount  of  .expenditure 
determined  upon  in  advance,  and  thus  arise  oppor- 
tunities for  extravagance;  taxation  may  be  called 

12 


i.]  DEFENCE   AND   JUSTICE 

upon  to  meet  the  outlay  upon  projects  which  are  the 
fads  of  a  party  temporarily  in  office,  or  for  the  gratifica- 
tion of  a  popular  sentiment  which  has  not  counted  the 
ultimate  cost  of  its  demands.  Taxation  always  reduces 
the  spending  power  of  the  tax-payer  by  the  amount 
he  contributes  to  the  State ;  although  expended  by  the 
Government  in  employing  labour  in  the  performance 
of  some  necessary  duty,  it  yet  reduces  the  consumption 
of  commodities  by  those  from  whom  the  tax  is  taken, 
and  to  that  extent  their  power  of  creating  a  demand  for 
labour  is  contracted.  In  deciding  upon  any  extension 
of  the  functions  of  government  it  is  necessary  to  balance 
the  advantages  of  increased  efficiency  to  be  gained 
thereby  against  the  effect  of  increased  taxation  upon 
the  community. 

It  will  be  seen  that  by  far  the  largest  portion  of 
public  expenditure  is  occasioned  by  the  necessity  for 
national  defence,  and  by  those  lawless  propensities 
which  entail  an  elaborate  system  for  securing  civil 
and  criminal  justice.  Public  outlay  for  these  purposes 
is  generally  admitted  to  be  unavoidable. 

The  maintenance  of  justice  is  an  obvious  duty  of 
government ;  it  is  included  under  Adam  Smith's  second 
class  of  public  duties,  its  object  being  security  of  life 
and  property  at  home.  It  involves  a  costly  legal 
machinery  to  secure  the  rights  of  individuals,  including 
expenditure  on  law  courts,  police,  prisons,  etc.  Such 
expenditure  grows  as  the  community  expands  its 
ideas  concerning  the  duty  of  advancing  humanitarian 
aims.  Only  a  small  portion  of  this  outlay  is  recovered 
from  offenders  against  the  law :  practically  the  whole 
cost  of  criminal  legislation  and  most  of  the  cost 
of  other  legal  machinery  fall  upon  the  community. 

13 


NATURE   OF   PUBLIC   EXPENDITURE    [CHAP. 

Certain  legal  services  are  paid  for  in  fees  by  those  who 
benefit  thereby,  as  in  the  case  of  patents  ;  and  deeds 
and  documents  of  various  kinds  are  rendered  legal  by 
the  stamp-duty  or  by  the  fees  for  public  registration, 
but  these  affect  only  a  very  small  section  of  legal 
expenditure. 

Security  of  property  is  essential  to  prosperity ;  its 
absence  is  most  adverse  to  wealth-production,  and 
thus  taxation  incurred  in  maintaining  justice  must  be 
regarded  as  a  price  paid  by  a  community  to  enable  it 
to  pursue  its  avocations  with  safety,  and  as  a  means 
of  calling  into  existence  a  larger  body  of  wealth  than 
would  be  created  in  its  absence.  Similarly  the 
expenditure  upon  persons  with  criminal  propensities  is 
inevitable ;  we  must  either  suffer  from  their  predatory 
tendencies,  or  pay  the  cost  of  secluding  them,  and  of 
aiming  by  methods  of  discipline  at  their  reformation 
and  the  diminution  of  their  class. 

The  relief  of  the  poor  has  been  recognised  as  a  State 
duty  from  the  period  of  the  decline  of  the  monastic 
system ;  its  provision  was  found  ineffective  unless 
under  organised  public  control,  and  it  was  made  legal 
by  the  Poor  Law  Act  of  1601.  Experience  has  proved 
that  some  methods  of  relieving  poverty  only  increase 
the  evil ;  and  while  the  principle  has  been  adopted  that 
the  indigent,  helpless,  orphaned,  and  insane  cannot  be 
allowed  to  perish  from  want,  the  problem  of  their 
support  is  one  which  can  be  solved  only  by  some  form 
of  public  provision.  The  neglect  of  this  duty  would  be 
both  a  public  scandal  and  a  social  danger,  hence  it 
becomes  necessary  for  the  State  to  devise  methods  of 
a  general  character  to  provide  some  kind  of  public 
relief;  the  exercise  of  private  charity  is  not  thereby 

14 


L]  POVERTY   AND   EDUCATION 

superseded,  and  there  is  scope  for  wise  co-ordination 
that  both  systems  of  aid  may  work  in  harmony,  so  as 
to  secure  the  maximum  of  good  to  the  community. 
To  provide  relief  for  the  needy  without  encouraging 
idleness,  to  help  without  pauperising  and  without 
unduly  burdening  the  industrious,  are  aims  as  yet 
imperfectly  realised  by  State  activity  in  this  direction. 
This  recognised  public  duty  is,  however,  a  source  of 
heavy  taxation.  It  is  carried  out  by  the  joint  action 
of  central  and  local  administration  ;  the  central  govern- 
ment initiates,  regulates,  and  inspects ;  the  several 
localities  levy  the  rates  and  administer  the  system ; 
the  object  is  to  secure  efficiency  and  also  elasticity  of 
method  by  adaptation  to  local  conditions. 

Education,  formerly  left  to  the  voluntary  action  of 
the  benevolent  and  religious  instincts,  has  during  the 
nineteenth  century  come  to  be  regarded  as  a  national 
duty.  Great  Britain  expends  upon  public  education 
some  ;£i  5, 500,000  from  imperial  revenue,  and  about 
other  ,£10,000,000  from  local  taxation.  The  outlay  is 
justified  morally  by  its  deterrent  action  upon  vice  and 
crime,  economically  by  enhancing  the  productive  power 
of  the  nation,  which  depends  upon  its  knowledge,  skill, 
and  capacity.  To  secure  this  efficiency,  compulsory 
attendance  at  school  is  necessary  up  to  some  point ; 
compulsion  entailed  public  aid,  and  this  led  to  free 
primary  education.  The  economic  argument  for  public 
expenditure  upon  secondary  and  technical  education, 
research  work,  museums,  art  galleries,  libraries,  etc., 
rests  on  the  same  principle  of  public  utility  ;  its  tendency 
is  to  yield  results  profitable  to  the  nation  far  beyond 
the  cost,  if  only  wisely  directed.  Such  outlay  is 
regarded  as  capital  sunk  for  the  future  progress  of 

15 


NATURE   OF   PUBLIC   EXPENDITURE    [CHAP. 

the  nation,  and  must  be  classed  as  a  productive  invest- 
ment. Private  munificence  in  the  form  of  endow- 
ments is  beneficial,  but  it  is  very  inadequate  in  amount. 
Education  is  a  matter  of  public  concern ;  both  the 
amount  which  should  be  expended  upon  it  by  the 
nation,  and  the  best  methods  of  expenditure  are  still 
matters  of  controversy ;  in  any  case  judicious  expenditure 
on  education  is  profitable  to  the  public,  but  it  makes 
a  heavy  demand  upon  both  the  imperial  revenue  and 
the  local  rates.  A  further  argument  for  public  educa- 
tional expenditure  is  based  on  moral  grounds,  and  is 
analogous  to  that  which  is  a  main  support  of  poor-law 
relief,  viz.,  that  it  is  unjust  that  those  whom  the  accident 
of  birth  has  placed  in  less  advantageous  conditions 
should  suffer  from  the  want  of  that  equipment  which 
can  give  them  reasonable  opportunities  of  happiness  ; 
in  other  words,  it  is  contended  that  there  should  be 
approximate  equality  of  opportunity. 

Other  forms  of  public  expenditure  included  in 
the  optional  group  fall  under  Adam  Smith's  third 
category  of  works  of  public  advantage, — lighthouses, 
harbours,  roads,  bridges,  and  in  some  cases  railways, 
telegraphs,  and  the  various  means  of  transport  and 
communication  vital  to  economic  well-being.  These 
are  classed  as  optional  measures,  because  it  is  un- 
certain whether  they  would  be  adequately  supplied  by 
voluntary  effort,  or  to  what  extent  public  expenditure  is 
necessary,  and  what  form  it  should  take.  Where  capital 
and  energy  are  abundant,  railways  and  other  means  of 
transport  may  be  best  supplied  by  private  enterprise, 
the  State  controlling  its  direction,  and  retaining  super- 
vision over  its  methods  in  the  interests  of  public  safety. 
In  other  cases,  where  the  economic  resources  of  the 

16 


i.]  MINOR   CAUSES   OF   EXPENDITURE 

country  are  undeveloped,  the  State  creates  a  great 
utility  by  providing  the  means  of  communication 
and  transit.  India,  the  British  Colonies,  and  other 
countries  have  demonstrated  the  remunerative  character 
of  this  kind  of  public  expenditure.  There  is,  however, 
always  a  danger  of  extravagance  and  misdirected 
expenditure  in  these  undertakings ;  localities  which 
will  derive  benefit  thereby  are  apt  to  take  exaggerated 
views  of  the  public  advantage  to  be  gained,  and  to  press 
their  claims  for  the  outlay  with  little  moderation  when 
the  risks  of  loss  are  assumed  by  the  public  exchequer. 

Many  other  services  are  performed  by  the  State  for 
purposes  of  general  utility  and  convenience.  Registra- 
tion of  births,  deaths,  marriages,  contracts,  wills,  etc., 
the  collection  of  statistics  of  population,  trade,  industry, 
health,  etc.,  the  control  of  the  coinage  and  currency, 
the  fixing  of  standards  of  weights  and  measurement, 
are  examples  of  services,  some  of  which  would  either 
not  be  performed  at  all,  or  would  be  carried  out  with 
less  efficiency  if  left  to  individual  action.  As  will  be 
seen  later,  direct  aids  to  specific  industries  by  protective 
tariffs,  bounties,  and  subsidies,  which  have  been,  and 
are  still  widely  regarded  as  within  the  sphere  of  State 
action,  are  to  be  condemned,  since  their  effect  is  to  yield 
profit  only  to  a  favoured  few  at  much  expense  and 
loss  to  the  community,  while  restricting  that  healthy 
competition  which  makes  for  progress  and  efficiency. 

The  field  for  public  action  is  thus  seen  to  be  extensive 
and  capable  of  indefinite  expansion.  Its  limits  are 
entirely  determined  by  expediency  ;  no  absolute  criterion 
can  be  laid  down,  except  that  evidence  and  argument 
shall  in  each  case  demonstrate  advantage  to  the  public 
interest,  and  that  the  common  gain  is  worth  the  cost ; 
and  if  it  be  decided  that  a  new  public  departure  is 

17  c 


NATURE   OF   PUBLIC   EXPENDITURE    [CHAP. 

desirable,  an  experiment  should  first  be  made  on  a 
small  scale  whenever  that  is  possible.  Certain  guiding 
general  principles  can  be  stated :  —  public  action 
should  not  tend  in  any  degree  to  stifle  private  enter- 
prise whenever  this  would  be  effective  ;  the  State  should 
not  enter  upon  undertakings  of  a  speculative  nature  ; 
in  cases  involving  large  outlay  adequate  proof  of  the 
need  and  benefit  of  such  expenditure  should  be  forth- 
coming ;  the  project  should  not  benefit  one  class  at 
the  expense  of  others,  but  the  economic  advantage  to 
society  as  a  whole  should  be  distinctly  proved  ;  and  all 
State  undertakings  should  be  of  such  a  kind  as  to  be 
open  to  public  observation  and  criticism,  both  in  their 
financial  effects  and  in  their  operations. 

In  Great  Britain  the  National  Expenditure  comes  up 
for  review  by  Parliament  annually  in  "  The  Budget,"  or 
national  balance  sheet.  This  is  the  statement  submitted 
by  the  Chancellor  of  the  Exchequer  as  Finance  Minister, 
and  as  the  mouthpiece  of  the  Cabinet,  which  is  collec- 
tively responsible  for  the  Budget.  He  first  renders  an 
account  of  the  past  year's  income  and  expenditure,  and 
then  submits  an  estimate  of  the  proposed  expenditure 
for  the  coming  year,  and  also  the  measures  proposed  for 
"  the  supply  "  of  revenue.  The  expenditure  falls  under 
two  heads:  (i)  Consolidated  Fund  Charges,  which  are 
the  more  permanent  charges  authorised  by  Parliament 
to  be  paid  without  annual  renewal  of  Parliamentary 
authority.  These  charges  consist  of  interest,  annuities, 
and  the  sinking  fund  of  the  public  debt,  the  Civil  list, 
expenses  of  Courts  of  Justice,  etc.,  and  special  pensions. 
(2)  Supply  Charges.  These  are  voted  annually,  and 
consist  of  the  expense  of  the  Civil  Services  and  collec- 
tion of  revenue,  and  the  cost  of  defence  (army  and 
navy,  etc.)  and  education.  For  the  preparation  of  the 

18 


i.]  THE   BUDGET 

Budget  the  Treasury  receives  detailed  estimates  from 
the  various  government  departments.  Much  skill  and 
experience  are  required  to  forecast  the  revenue  of  the 
coming  year ;  the  estimates  must  not  be  over-sanguine, 
nor  must  the  possible  expenditure  be  under-rated.  As 
a  rule,  great  accuracy  is  attained  owing  to  the  cumula- 
tive experience  of  the  permanent  financial  officials. 

It  is  a  salutary  principle  of  the  British  Constitution 
that  all  proposals  for  expenditure  must  come  from 
the  Ministry.  The  House  of  Lords  does  not  deal  with 
financial  questions ;  after  criticism  by  the  House  of 
Commons  in  Committee  the  expenditure  and  proposed 
taxation  are  determined  by  votes  of  the  House.  Since 
the  lower  House  only  can  introduce  money-bills  the 
people  are  said  to  vote  their  own  taxes.  The  sums 
voted  are  appropriated  to  definite  expenditure,  as 
set  forth  in  the  estimates,  and  cannot  be  applied  to 
other  purposes.  An  elaborate  system  of  administrative 
control  precludes  any  misappropriation.  The  revenues 
as  they  are  collected  are  deposited  at  the  Bank  of 
England,  which  is  the  banker  to  the  State.  Payments 
are  made  by  the  Bank  only  in  accordance  with  an  Act 
of  Parliament,  and  by  orders  from  the  Comptroller- 
General  and  the  Treasury.  All  accounts  are  audited  by 
a  special  government  department,  called  the  Exchequer 
and  Audit  Department,  and  finally  a  report  is  made 
to  the  Parliamentary  Committee  of  Public  Accounts. 
Thus  the  authority  for  expenditure  and  taxation 
emanates  from  Parliament,  and  the  detailed  state- 
ment of  the  accounts  of  the  nation  is  rendered  to 
Parliament  after  the  close  of  the  financial  year.  A 
system  similar  in  principle,  though  differing  greatly 
in  detail,  obtains  in  other  countries. 

The    following    Tables,    taken    from     the    Finance 

19 


NATURE   OF   PUBLIC   EXPENDITURE      [CHAP,  i 

Accounts,    1904-5,   give   a  summary   of  the   gross   national 
Revenue  and  Expenditure  for  that  year. 

UNITED  KINGDOM. 
REVENUE. 


TAX  REVENUE:— 
Customs       .        .        .      £35,730,000 
Excise  ....         30,750,000 
Property  and   Income- 
Tax  ....          31,250,000 
Estate  Duty          .        .          12,350,000 
Stamps          .         .         .            7,700,000 
Land  Tax     .        .        .              750,000 
House  Duty          .         .            2,000,000 

TOTAL   .        .     £120,530,000 

NON-TAX  REVENUE  :— 

Post  Office  .        .        .       £16,100,000 
Telegraphs  .        .        .           3,830,000 
Crown  Lands       .        .              470,000 
Suez  Canal  Dividends  .            1,014,303 
Miscellaneous       .        .           1,426,100 

TOTAL   .       .     £22,840,403 

GRAND  TOTAL  . 

EXPENI 

CONSOLIDATED  FUND  SERVICES  :— 

i.  National  Debt  Services  — 

(a)  Funded    Debt 
(Interest)     .       £15,938,916 
Terminable 
Annuities     .            6,518,738 
(6)  Unfunded  Debt 
(Interest)     .           2,116,447 
(c  )  Management  of 
Debt    .        .              188,225 
(d)  New     Sinking 
Fund  .        .           2,237,679 

£27,000,000 

£143,370,403 

HTURE. 

SUPPLY  SERVICES  :  — 

4.  Defence  — 
Army  Services  and 
Ordnance  Factories  £29,225,000 
Navy  Services      .         36,830,000 

£66,055,000 

5.  Civil  Services  — 
(i)  Public    Works, 
etc.      .         .         £2,497,090 
(2^  Civil  Depts.      .            2,561,176 
(3)  Law  and  Justice          3,760,135 
(4)  Education         .          15.574,513 
(5)  Foreign    and 
Colonial      .           2,075,148 
(6)  Non-effective    .              652,670 
(7)  Miscellaneous  .               629,268 

£27,450,000 

2.  Other    Consolidated 
Fund  Services,  in- 
cluding Courts  of 
Justice,  Civil  List, 
etc.       .         .         .        £1,608,630 

*3.  Payments  to    Local 
Taxation  Accounts          1,156,867 

6.  Collection  of  Revenue  — 
(a)  Customs  .         .            £908,000 
(b)  Inland  Revenue           2,185,000 
7.  Post  Office       .         .          10,198,000 
8.  Telegraph  Service    .            4,660,000 
9.  P.O.  Packet  Service              735,000 

£2,765,497 

£18,686,000 

GRAND  TOTAL  .     £141,956,497 

*In  addition  to  this  amount,  a  sum  of  £9,812,378,  collected  by  the  Inland 
Revenue,  was  paid  to  the  Local  Taxation  Accounts,  to  be  expended  on  the  relief  of 
local  taxation. 

20 


CHAPTER  II 

SOURCES    OF  IMPERIAL    REVENUE,  AND    THEORIES  OF 
TAXATION 

IN  primitive  times  the  revenue  of  the  sovereign  was 
derived  almost  entirely  from  land,  which  was  then  the 
chief  source  of  wealth.  From  the  Norman  Conquest 
to  the  middle  of  the  sixteenth  century  the  royal 
demesne,  customs  duties,  and  various  direct  taxes 
— aids,  benevolences,  poll-taxes,  etc.,  were  the  chief 
sources  of  revenue.  But  the  hereditary  estate  of  the 
Crown  was  much  wasted  by  extravagance  and  gifts 
of  the  rulers,  especially  under  Henry  VIII.  and  his 
son  ;  and  at  a  later  period  with  the  growth  of  popular 
rule,  what  remained  passed,  under  the  administration 
of  the  State.  In  Great  Britain  State  property  has 
long  ceased  to  provide  any  significant  proportion 
of  public  revenue.  But  land  and  natural  resources 
are  still  an  important  source  of  revenue  in  some 
countries ;  e.g.,  Austria  and  Russia  possess  extensive 
public  lands.  In  England,  the  United  States,  and  the 
British  Colonies  most  land  has  passed  into  private 
ownership,  and  only  as  a  taxable  form  of  wealth 
does  it  supply  revenue.  The  alienation  of  public 
land  was  advocated  by  Adam  Smith  and  J.  S.  Mill 
on  economic  grounds;  they  held  that  the  public 

21 


SOURCES  OF   IMPERIAL   REVENUE       [CHAP. 

administration  of  land  was  costly,  and  that  private 
ownership  led  to  more  rapid  development  through 
the  motive  of  personal  interest,  and  they  maintained 
that  the  prosperity  thus  created  would  yield  a  larger 
source  of  public  revenue  than  State  ownership.  It 
may  be  noted  that  this  doctrine  is  illustrated  in  the 
practice  of  the  self-governing  colonies,  and  that  Canada 
in  particular  has  attracted  emigrants  and  gained  develop- 
ment by  the  offer  of  free  grants  of  land  to  settlers. 

In  India  three-sevenths  of  the  net  revenue  is  derived 
from  the  land.  But  the  circumstances  of  India  are 
peculiar,  inasmuch  as  the  sovereign  authority  from 
time  immemorial  has  claimed  a  share  in  the  produce 
of  the  soil.  The  Government  owns  and  administers 
the  land,  letting  it  at  a  moderate  rent,  which  is 
popularly,  but  loosely,  denominated  a  land-tax. 

In  some  countries  forests,  mines,  and  other  natural 
products  yield  a  revenue  to  the  State ;  some  of  these 
resources  tend,  however,  to  become  exhausted  in  time, 
and  are  encroached  upon  with  the  growth  of  popula- 
tion. Germany  still  obtains  a  large  revenue  from 
forests,  as  also  does  British  India ;  and  the  island  of 
Formosa  gives  Japan  a  revenue  derived  from  the  govern- 
ment monopoly  of  a  natural  product,  the  camphor  tree. 
In  many  countries  the  government  controls  certain 
industries  for  the  purposes  of  revenue.  The  very  con- 
siderable tobacco  industry  in  France  is  an  example 
of  a  State  monopoly  maintained  for  revenue.  The 
system,  though  it  produces  a  revenue  to  the  State, 
cannot  be  considered  economic ;  it  is  generally  held 
that  the  State  manufactured  article  is  inferior  to  that 
which  is  produced  under  free  enterprise,  and  the 
industry  is  open  to  all  the  defects  that  were  mentioned 

22 


ii.]  NATIONAL   REVENUE 

as  incidental  to  government  production.  In  India  the 
British  Government  possesses  a  somewhat  exceptional 
monopoly  in  the  opium  trade,  from  which  it  raises 
a  large  revenue,  as  the  circumstances  are  peculiarly 
favourable  to  the  production  of  opium.  It  is  mostly 
exported,  and  a  considerable  profit  is  derived  from  its 
production  and  sale.  The  Prussian  Government  owns 
and  conducts  its  railways  at  a  profit,  though  the  motive 
in  this  case  is  not  purely  financial.  In  Great  Britain 
the  only  State  monopoly  yielding  income  is  the  Post 
Office,  from  which  a  net  revenue  of  about  £5,500,000 
is  obtained. 

The  gross  national  revenue  of  the  United  Kingdom 
(excluding  that  raised  for  local  purposes)  amounted 
for  the  year  1904-5  to  ^"143,370,000.  Of  this  sum 
84  per  cent,  was  raised  by  taxation  ;  £66,000,000  on 
commodities,  ^31,000,000  from  income  and  property 
tax,  £12,000,000  from  realised  wealth  passing  at  death, 
£7,700,000  from  duties  on  transactions,  and  £2,000,000 
from  taxes  on  occupied  houses  and  business  premises. 

The  British  fiscal  system  is  the  outcome  of  a  long 
evolutionary  process,  during  which  taxation  has  become 
almost  the  only  source  of  revenue:  many  earlier  methods 
of  raising  revenue  have  become  unremunerative,  and 
some  have  lapsed  because  unsuitable  to  the  political 
ideas  and  aims  of  a  self-governing  people.  The  control 
and  administration  of  public  finance  are  now  among 
the  most  important  functions  of  the  House  of  Commons. 
Taxation  no  longer  takes  the  form  of  a  customary  service 
or  an  arbitrary  exaction  by  a  superior  authority,  but 
is  determined  by  popular  will  and  sentiment,  and  it 
professes  to  conform  to  certain  principles  of  justice 
and  productiveness.  It  is  compulsory  in  that  it  exacts 

23 


THEORIES  OF  TAXATION  [CHAP. 

contributions  from  private  income  for  public  purposes. 
The  legislature  determines  its  nature  and  amount, 
provides  the  machinery  for  its  collection,  and  enforces 
the  payment.  The  system  has  been  evolved  gradually 
under  the  influence  of  political  and  economic  ideas. 
The  aim  is  to  secure  that  all  citizens  contribute  in  pro- 
portion to  their  means,  with  no  undue  pressure.  From 
the  nature  of  the  circumstances  many  inequalities  must 
arise ;  neither  absolute  equity  nor  perfect  economic 
working  can  be  assured,  and  the  problem  of  the  best 
system  will  remain  an  abstract  question  so  long  as 
societies  and  conditions  are  liable  to  change. 

Self-taxation  by  voluntary  subscription  has  been  put 
forth  as  the  ideal  system.  Utopian  as  this  notion  is, 
something  of  the  kind  formerly  existed  in  several  small 
city  states ;  Hamburg,  Zurich,  and  Basle  at  one  period 
derived  most  of  their  revenue  from  the  voluntary  self- 
assessment  of  their  citizens.  Its  success  rested  on  a 
species  of  republican  patriotism,  much  to  be  admired, 
which  found  scope,  however,  in  a  very  limited  area,  and 
was  of  a  civic  rather  than  a  national  character.  It  is  to 
be  feared  that  this  system,  still  occasionally  advocated, 
would  form  a  very  doubtful  source  of  State  revenue,  and 
would  yield  a  very  unreliable  budget  in  the  circum- 
stances of  any  modern  State. 

A  theory  of  taxation,  at  one  time  prevalent,  held  that 
taxes  were  the  equivalent  given  by  citizens  for  the 
benefits  they  derived  individually  from  the  State.  This 
doctrine,  sometimes  spoken  of  as  the  "  Social  Dividend  " 
or  "  Quid  pro  quo  "  theory,  does  not  offer  a  satisfactory 
basis  for  imperial  taxation.  The  idea  probably  arose  in 
those  early  times  when  personal  service  was  exacted 
from  every  tenant  by  his  over-lord.  With  commutation 

24 


ii.]          THE   "QUID  PRO   QUO"  THEORY 

of  service,  the  notion  became  associated  with  money- 
payments.  In  course  of  time  the  sovereign  came  to 
be  regarded  as  the  source  of  authority  and  right,  and 
to  be  entitled  to  taxes  for  the  protection  and  security 
conferred  under  his  rule ;  privileges  and  monopolies, 
derived  from  the  same  source,  confirmed  the  impression  ; 
and  down  to  comparatively  recent  times,  the  payment 
of  taxes  was  interpreted  as  a  payment,  more  or  less  just, 
for  personal  advantages  conferred  by  the  government. 

In  his  "Esprit  des  Lois"  Montesquieu  lays  down 
the  doctrine  that  "  the  revenues  of  the  State  consist 
of  the  portions  which  each  citizen  gives  of  his  fortune, 
in  order  to  enjoy  securely  the  rest."  This  view 
apparently  gives  expression  to  the  quid  pro  quo 
theory  of  taxation.  The  doctrine,  however,  seems  to 
ignore  the  most  important  and  really  fundamental 
advantages  which  follow  upon  the  evolution  of  a  society, 
viz.,  the  unity  and  solidarity  of  its  co-operative 
organisation ;  and  it  overlooks  the  fact  that  the 
services  of  the  State  are  wholly  incapable  of  exact 
measurement  and  apportionment  to  individuals.  If 
the  State  merely  offered  to  each  individual  security 
of  life  and  property  in  exchange  for  taxes,  the  weak 
as  requiring  greater  protection  should  pay  more  than 
the  strong,  and  those  most  able  to  pay  might  contribute 
least.  Obviously  this  view  will  not  bear  criticism  ; 
contribution  to  public  expenditure  is  not  a  purchase 
or  exchange,  but  a  response  to  a  national  demand  on 
account  of  a  common  good ;  its  raison  cCetre  is  that 
it  confers  collective  advantages  which  cannot  be  stated 
in  quantitative  terms,  and  which  are  not  meted  out 
to  individuals  ;  the  benefit  arising  from  the  solidarity 
of  society  is  incalculable,  the  expenditure  is  general, 

25  D 


THEORIES  OF  TAXATION  [CHAP. 

and  the  revenue  is  a  joint  necessity  which  must  be 
subscribed  to  by  individual  citizens,  not  for  their  share 
as  such,  but  for  collective  benefits  derived  from  their 
common  existence  as  a  State.  Only  a  very  small  part 
of  public  revenue — postal  and  telegraph  charges,  and 
some  fees  in  the  Courts  of  Justice,  etc. — is  an  equivalent 
for  special  services.  Public  wants  and  common  benefits 
are  the  grounds  of  taxation  ;  whence  it  follows  that 
no  class  should  be  exempted  from  taxation ;  all  derive 
some  advantages  from  the  commonwealth,  and  all  should 
share  in  both  the  duties  and  responsibilities  of  citizen- 
ship, according  to  their  capacity. 

Adam  Smith  and  Ricardo  discussed  the  incidence 
of  taxes  as  falling  upon  wages,  profits,  and  rent.  Since 
these  constitute  the  national  dividend,  and  are  the 
only  elements  in  income,  a  tax  on  income  must  fall 
upon  one  or  other  of  them  ;  but  the  enquiry,  though 
valuable  for  disclosing  the  effects  of  special  taxation 
on  these  forms  of  income,  does  not  afford  a  valuable 
classification  of  taxes.  Many  incomes,  moreover,  are 
composed  partly  of  wages  and  partly  of  profits  or 
rent ;  indeed,  economic  analysis  shows  that  in  most 
incomes  from  skill,  the  three  are  inseparably  inter- 
mingled ;  rent  of  ability  and  interest  on  capital,  sunk 
either  in  the  individual  or  in  his  instruments,  are 
included  in  the  reward  of  skilled  labour.  In  the 
expenditure  upon  taxed  tea,  tobacco,  or  wine  of  a 
professional  man,  it  would  be  impossible  to  say 
whether  the  duty  fell  upon  wages,  profits,  or  rent ;  it 
is  sufficient  that  it  is  paid  out  of  his  total  income. 

Taxation  is  sometimes  represented  as  "  a  good  invest- 
ment, and  one  that  returns  interest  to  the  community." 
This  statement  cannot  be  accepted  simply  as  a  general 

26 


IL]        TAXATION   "A   GOOD   INVESTMENT" 

truth ;  it  requires  careful  interpretation,  otherwise  it 
might  constitute  a  dangerous  encouragement  to  extra- 
vagance, and  lead  to  a  ruinous  degree  of  taxation.  The 
condition  of  Egypt  under  Ismail  Pasha,  and  that  of 
Great  Britain  in  the  early  part  of  the  nineteenth  century, 
notwithstanding  the  counteracting  influences  of  the 
new  industrial  developments,  afford  startling  evidence 
of  the  disastrous  effects  of  excessive  taxation.1  All 
taxes  are  deductions  from  the  spending  power  of 
individuals,  and  therefore  from  their  demand  for 
products  of  industry ;  they  thus  diminish  voluntary 
consumption  and  production.  Since  taxation  does 
not  create  wealth  but  only  diverts  it  into  the  hands 
of  government,  it  cannot  be  justified  except  by  its 
expediency,  and  it  is  only  a  good  investment  when 
its  objects  are  clearly  beneficial  to  the  community, 
and  when  the  taxes  are  raised  by  methods  which  are 
just  and  economic.  Burdensome  and  unjust  taxation 
reduces  the  productive  capacity  of  a  nation,  and  can 
only  tend  to  its  exhaustion.  A  nation  does  not 
become  prosperous  in  proportion  to  the  amount  of 
its  taxation,  but  it  is  able  to  bear  heavy  taxation 
with  less  suffering  when  it  is  prosperous  and  wealthy. 
The  drain  of  the  South  African  War  upon  British 
finances  is  an  example  of  this  fact ;  and  the  com- 
parative ease  with  which  this  burden  has  been  borne 
is  strong  testimony  to  the  previous  prosperity  of  the 
country. 

It  has  been  urged  that  an  increase  of  taxation  may 

1  Jevons,  "The  Match  Tax."  We  may  start  with  the  concession 
that  every  tax  is  bad,  but  as  we  must  have  revenue,  the  question 
really  takes  the  form  whether  one  tax  is  bad  compared  with  others 
existing  or  proposed. 

2? 


THEORIES   OF   TAXATION  [CHAP. 

lead  to  a  larger  production  of  wealth  by  stimulat- 
ing industry  and  calling  forth  additional  effort ;  thus 
increased  thrift  and  toil,  it  is  argued,  will  create  a  new 
store  of  wealth  which  will  compensate  the  tax-payers 
for  the  amount  extracted  by  taxation.  This  contention 
has  a  very  partial  application,  and,  indeed,  is  somewhat 
sophistical ;  it  is  more  probable  that  the  tendency  would 
be  to  crush  enterprise,  to  paralyse  effort,  and  to  reduce 
consumption.  Hopefulness  and  the  prospect  of  the 
assured  enjoyment  of  the  fruits  of  industry  form  a 
stronger  stimulus  to  effort  than  augmented  taxation, 
and  it  is  only  in  so  far  as  it  extends  these  favourable 
conditions  that  taxation  can  be  an  incentive  to  industry. 
The  leading  maxim  of  taxation  in  Great  Britain 
during  the  last  sixty  years  has  been  that  "  taxes  should 
be  imposed  for  revenue  only."  Taxation,  however,  is 
often  advocated  as  an  instrument  for  other  purposes, 
and  especially  for  the  protection  and  fostering  of 
native  industries.  Here  the  avowed  object  is  the  im- 
position of  duties  upon  imports,  not  for  the  purpose  of 
realising  a  revenue  from  the  admission  of  the  foreign 
articles,  but  with  the  aim  of  excluding  them  from  the 
country  and  thereby  giving  a  preference  to  home 
products,  which  are  at  some  economic  disadvantage 
—  greater  cost  of  production  or  inferior  quality  —  in 
comparison  with  the  foreign  article.  The  economic 
results  of  this  system,  which  is  widely  prevalent  in 
foreign  countries,  are  that  the  industries  protected  by 
the  tariff  are  maintained  only  by  the  exclusion  of 
foreign  competition,  and  the  loss  involved  in  the 
higher  cost  of  production  falls  upon  consumers  in  the 
form  of  higher  prices  ;  there  is  also  a  corresponding 
diminution  in  the  production  of  other  goods,  articles 

28 


ii.]  TAXATION    FOR   "PROTECTION" 

of  export,  which  in  the  absence  of  a  tariff  would  have 
been  produced  as  a  means  of  purchasing  from  abroad 
the  goods  excluded  under  the  tariff.  One  trade  is 
encouraged,  in  fact,  at  the  expense  of  others ;  there 
is  a  diversion  of  industry  resulting  in  economic  loss. 
The  taxation  takes  the  form  of  more  expensive  com- 
modities, and  yields  little  or  nothing  to  the  State.  It 
is  a  contradiction  in  terms  to  say  that  a  tax  can  be 
both  protective  and  revenue-yielding ;  in  so  far  as  it 
does  the  one  it  excludes  the  other. 

This  system  of  taxation  was  practically  abolished 
in  Great  Britain  after  the  Repeal  of  the  Corn  Laws 
in  1846,  though  it  was  not  entirely  eliminated  from 
the  British  system  until  1860.  Strong  attempts  have 
recently  been  made  to  re-establish  protective  taxation 
on  various  grounds,  not,  however,  wholly  consistent 
with  one  another.  For  example,  it  is  proposed  (i)  to 
give  a  preference  to  colonial  products  by  imposing 
heavy  duties  on  foreign  produce,  with  the  object  of 
diverting  our  foreign  trade  to  the  Colonies,  and  ulti- 
mately securing  a  self-sufficing  British  Empire.  It  is 
also  proposed  (2)  to  exclude  foreign  products  by 
means  of  a  tariff  in  order  to  encourage  home  industries. 
And,  again,  it  is  proposed  (3)  to  place  retaliatory  duties 
upon  imports  from  other  countries  in  order  to  compel 
those  nations  to  reduce  their  tariffs  on  British  goods, 
and  thus  increase  British  trade  with  those  countries. 
These  arguments  may  severally  appeal  to  different 
classes,  but  it  is  logically  impossible  for  all  three 
objects  to  be  attained  by  any  system  of  tariffs,  while 
it  is  equally  certain  that  the  re-imposition  of  protective 
duties  would  be  the  cause  of  great  economic  loss  to 
Great  Britain. 

29 


THEORIES   OF  TAXATION  [CHAP. 

Governments  have  often  attempted  by  means  of 
"  Sumptuary  Laws "  to  regulate  consumption,  and  to 
place  a  check  upon  extravagance  and  luxurious  ex- 
penditure, which  were  thought  to  threaten  the  physical 
stamina  of  the  nation  or  to  weaken  its  moral  fibre. 
Taxation  of  luxuries  has  also  been  advocated  with  a 
like  moral  aim.  The  drink  duties  receive  much  support 
on  this  ground,  and  many  total  abstainers  would  like 
to  see  these  duties  increased  to  such  a  degree  as  entirely 
to  repress  the  drink  traffic ;  they  argue  that  the  increase 
in  wealth  which  would  follow  upon  total  abstinence, 
together  with  the  reduction  in  the  cost  of  the  crime 
and  pauperism  which  are  the  consequences  of  drink, 
would  more  than  compensate  for  the  loss  of  revenue  at 
present  obtained  from  the  taxes  upon  drink.  Social 
and  moral  purposes  undoubtedly  fill  a  large  space 
among  the  causes  of  expenditure  which  determine 
taxation  ;  both  education  and  poor  rates,  and  the  outlay 
on  prisons  and  reformatories  exemplify  this  fact.  But 
the  employment  of  taxation  as  a  deliberate  instrument 
for  the  repression  of  a  kind  of  consumption  liable  to 
abuse  would  introduce  a  principle  capable  of  wide 
application,  and  one  which  would  clash  with  the 
primary  and  essential  object  of  taxation  ;  at  the  same 
time,  in  the  selection  of  commodities  for  taxation  the 
secondary  purpose  may  well  be  kept  in  view ;  e.g., 
luxuries  like  beer  and  tobacco  form  fitter  subjects  for 
taxation  than  bread,  which  is  a  necessary  of  life. 

Again,  socialists  seek  to  employ  taxation  as  an 
instrument  for  modifying  the  existing  social  system, 
especially  with  the  view  of  securing  a  more  equal 
distribution  of  wealth,  and  they  would  impose  heavy 
duties  upon  the  wealthier  classes  so  as  to  appropriate 

3° 


ii.]  TAXATION    FOR   "REVENUE" 

the  greater  part  of  their  wealth.  The  economic  effect 
of  such  taxation  would  be,  however,  to  destroy  the 
incentives  to  industry  and  saving,  and  the  growth  of 
capital  would  suffer.  The  advocates  of  such  measures 
forget  that  wealth  is  constantly  being  consumed  and 
re-created,  and  that  to  impair  the  motives  for  its 
reproduction  must  check  production  and  entail  wide- 
spread poverty. 

Accepting,  then,  the  doctrine  that  the  object  of  taxa- 
tion is  revenue  only,  we  require  some  principles  which 
should  govern  the  method  or  imposition  of  taxation. 
The  primary  principle  is  that  of  equity,  or  political 
justice,  which  is  embodied  in  Adam  Smith's  first  rule 
that  "  every  one  should  pay  in  proportion  to  his  ability." 
A  difficulty  at  once  arises  in  the  interpretation  of  the 
phrase  "ability  to  pay,"  or  of  those  terms,  "power," 
"  faculty,"  "  equality  of  sacrifice,"  which  have  been  used 
as  its  equivalents.  When  sacrifice  meant  military 
service  or  personal  labour,  this  "  equality."  or  contribu- 
tion according  to  ability  was  more  nearly  attainable, 
for  each  then  gave  of  his  time,  strength,  and  skill. 
Military  conscription  in  modern  times  makes  a  some- 
what similar  demand — each  citizen  soldier  gives  service  ; 
but,  apart  from  economic  objections  to  conscrip- 
tion, all  State  demands  cannot  be  met  by  military 
service ;  the  needs  of  modern  civilisation  require 
revenue.  The  difficulty  of  imposing  equal  sacrifice 
is  increased  under  the  very  complex  organisation  of 
modern  industrial  and  commercial  communities,  since 
values  and  charges  must  be  expressed  in  a  common 
standard  ;  "  ability  to  pay  "  must  therefore  be  translated 
into  terms  of  money,  and  taxation  must  be  devised 
so  as  to  fall  on  individuals  according  to  their  pecuniary 


THEORIES   OF   TAXATION  [CHAP.  n. 

capacity.  As  will  be  seen  later,  equity,  or  social  justice, 
can  only  be  approximately  secured,  and  it  can  be 
attained  most  nearly  by  a  composite  system  of  taxa- 
tion which  touches  various  interests  directly  or  in- 
directly. 

The  explanation  of  modern  systems  of  taxation 
must  take  account  of  their  historic  evolution  ;  many 
parts  of  the  British  system  can  only  be  understood 
when  they  are  seen  to  be  the  modern  equivalents  of 
earlier  modes  of  taxation,  which  have  been  transformed 
by  the  altered  conditions.  At  the  same  time,  under  the 
influence  of  guiding  principles,  new  forms  of  taxation 
have  taken  a  place  as  factors  in  an  aggregate  which 
on  the  whole  approximates  fairly  to  a  realisation  of 
the  maxim  of  political  justice.  The  recognition  that 
modern  taxation  is  the  outcome  of  a  gradual  evolution, 
and  that  the  existing  systems  in  different  countries 
are  survivals  of  much  older  systems,  modified  by  new 
circumstances,  by  economic  knowledge,  and  by  political 
ideas,  serves  to  explain  the  diversity  of  systems  in  those 
countries. 

The  nature  of  the  taxation  adopted  by  a  country 
affects  it  both  economically  and  socially ;  and  con- 
versely the  prevailing  conditions  and  ideas — economic, 
social,  and  political — must  largely  determine  the  forms 
of  taxation  which  a  country  will  adopt. 


CHAPTER    III 

PRINCIPLES   OF   TAXATION 

A  WELL-ORDERED  system  of  taxation  should  satisfy 
certain  fundamental  tests — the  principles  of  justice, 
productiveness,  economy,  and  simplicity.  It  should 
distribute  the  burden  fairly,  each  tax  should  yield 
revenue  without  waste  or  needless  cost,  and  the  system 
should  be  such  that  the  contributors  should  know 
approximately  what  they  are  paying.  Can  this  com- 
prehensive aim  be  better  attained  by  a  single  tax  or 
by  a  multiple  (composite)  system,  consisting  of  an 
aggregate  of  taxes?  A  single  tax  is  chiefly  recom- 
mended by  its  simplicity.  It  has  been  advocated  in 
the  form  of  an  income-tax,  and  also  (by  those  who 
have  regarded  land  as  the  sole  source  of  wealth)  as 
a  tax  upon  land. 

The  belief  in  the  justice  of  a  single  tax  upon  land 
was  very  prevalent  in  France  in  the  middle  of  the 
eighteenth  century.  The  Physiocrats,  the  economists 
of  the  day,  thought  they  had  discovered  in  the  impdt 
unique  a  method  of  taxation  which  had  its  warrant  in 
sound  economic  principles.  They  assumed  that  agri- 
culture in  all  cases  yielded  a  net  produit  or  surplus, 
which  did  not  accrue  in  any  other  form  of  industry. 
As  a  corollary  of  their  doctrine  they  held  that  all 


PRINCIPLES  OF  TAXATION  [CHAP. 

taxation  should  fall  upon  the  rent  of  land.  They  did 
not  perceive  that  a  large  part  of  agricultural  produce 
barely  repays  the  cost  of  its  production,  and  that  the 
land  from  which  it  is  obtained  consequently  yields 
no  rent.  Agricultural  rent  could  not  in  modern  con- 
ditions realise  sufficient  to  be  made  the  sole  basis  of 
taxation,  and  it  could  in  no  sense  satisfy  the  canon  of 
equity.  Economic  analysis  has  shown  that  rent  is 
an  element  which  arises  in  both  profits  and  wages. 
Further,  very  large  incomes  are  derived  in  modern 
times  from  commerce  and  manufactures,  which  a 
single  tax  on  land  would  leave  free,  while  the  rent 
of  agricultural  land  in  many  instances  represents  little 
beyond  the  interest  on  capital  expended  in  rendering 
it  productive  and  accessible.  Rent,  as  explained  by 
more  recent  investigation,  is  not  the  unique  or  simple 
agricultural  phenomenon  that  the  Physiocrats  imagined. 
The  single  tax  upon  land,  as  advocated  by  Henry 
George  and  others,  is  not  really  a  revenue  system 
conforming  to  canons  of  taxation,  but  a  scheme  for 
land  nationalisation  through  the  appropriation  of  rents  ; 
it  is  therefore  more  properly  discussed  elsewhere  in 
that  connection. 

Neither  could  the  income-tax  form  a  practical  basis 
for  raising  revenue  by  a  "single  tax."  It  would  be  found 
impossible  to  reduce  the  idea  to  a  working  scheme  ;  the 
poorer  classes  would  not  be  able  to  meet  the  demands 
of  such  a  direct  tax  at  all,  and  to  others  the  payment 
of  the  whole  of  their  taxation  in  the  form  of  a  single 
direct  tax  would  be  most  difficult,  perhaps  even  im- 
possible, while  the  attempt  would  lead  to  great  annoy- 
ance, evasion,  and  probably  resistance ;  the  assumed 
simplicity  of  a  single  tax  on  incomes  is  very  far  from 

34 


in.]  THE   SINGLE  TAX 

a  reality.  Again,  a  single  income-tax,  if  it  could  be 
adopted,  would  have  no  elasticity,  and  could  not,  like 
a  group  of  taxes,  be  readily  adapted  to  a  change  of 
circumstances  ;  the  tax  would  also  by  its  very  nature 
be  obnoxious  from  its  obtrusiveness,  and  no  gradua- 
tion or  manipulation  could  render  it  equitable.  In  a 
complex  and  highly  organised  society,  incomes  are 
derived  from  many  and  various  sources,  and  it  is  only 
by  means  of  a  composite  system  of  taxation  that 
different  classes  and  various  means  of  ability  to  pay, 
can  be  reached,  or  that  any  approximation  to  equity 
can  be  secured. 

Equally  unscientific  and  uneconomic  is  the  maxim 
of  Arthur  Young,  advanced  in  opposition  to  the  impot 
unique,  that  "  a  good  system  of  taxation  is  one  that 
bears  lightly  on  an  infinite  number  of  points,  heavily 
on  none."  There  is  a  suggestion  of  a  species  of  dissi- 
pation of  the  tax  or  of  unconsciousness  of  its  burden 
in  this  theory  which  gives  it  acceptance  ;  it  is,  however, 
very  fallacious.  Such  a  system  must  impose  a  variety 
of  duties  upon  income,  expenditure,  property,  means 
of  communication  and  transfer,  in  fact,  no  kind  of 
economic  operation  would  be  free ;  the  result  would 
be  an  elaborate  and  intricate  system  which  would 
place  numerous  impediments  on  production  and  trade, 
and  cause  waste,  uncertainty,  and  great  inequality.1 
The  elaborate  scheme  of  taxation  in  Great  Britain 
which  prevailed  from  the  beginning  of  the  French  war 

1  Jevons,  "  Principles  of  Economics."  If  we  have  very  few  taxes 
their  pressure  is  sure  to  be  uncertain  and  irregular.  If  we  have  a 
great  number  of  small  taxes,  the  interference  with  freedom,  the 
complexity  of  legislation  and  the  cost  of  collection  become  great 
compared  with  thjs  revenue  raised.  The  desideratum  is  a  limited 
number  of  taxes,  each  of  which  will  return  a  good  round  sum. 

35 


PRINCIPLES  OF  TAXATION          [CHAP. 

until  nearly  the  middle  of  the  nineteenth  century, 
illustrates  the  effects  of  pressure  at  many  points. 
The  burden  oppressed  all  classes,  and  especially  the 
poorest  consumers.  A  large  part  of  the  taxation  was 
unproductive  while  it  was  disastrous  in  its  effects 
on  production,  and  ruinous  in  its  exactions  from  every 
necessary  of  life. 

Sir  George  Cornewall  Lewis  formulated  the  maxim 
that  "the  aim  of  finance  is  to  raise  the  largest  sum 
of  money  with  the  least  trouble."  This  maxim  enforces 
the  two  cardinal  points  in  taxation  —  productiveness 
and  economy — but  fails  to  supply  the  means  for  their 
application  to  practice.  If  the  "trouble"  relates  only 
to  the  government,  it  may  work  out  unjustly  to  the 
tax-payer ;  if  it  be  considered  with  reference  to  the 
tax-payer,  its  economic  effects  upon  the  nation  may  be 
unsatisfactory.  Guidance  is  required  as  to  the  method 
by  which  it  shall  be  carried  out.  The  maxim  is  too 
abstract,  and  not  much  more  exact  than  the  definition 
of  the  French  Minister  Colbert  that  "the  art  of  taxation 
is  the  art  of  plucking  the  goose  so  as  to  get  the  largest 
possible  amount  of  feathers  with  the  least  possible 
squealing." 

The  terms  direct  and  indirect  applied  to  taxes  have 
reference  to  their  ultimate  incidence  or  burden. 

Direct  taxation  implies  that  a  tax  is  not  shifted  or 
transferred,  but  is  levied  at  once  upon  the  individual 
who  is  intended  to  bear  the  burden  ;  the  income-tax 
affords  the  most  obvious  illustration  of  direct  taxation. 
The  death  duties,  the  land-tax,  and  licences  for  carriages, 
dogs,  guns,  and  servants  are  other  examples.  Direct 
taxation  is  advocated  as  bringing  effectively  before  the 
payers  the  burdensome  character  of  taxation,  thereby 

36 


in.]  DIRECT  AND  INDIRECT  TAXES 

helping  them  to  understand  their  interest  as  citizens 
in  the  economic  conduct  of  the  State.  But  there  are 
practical  difficulties  in  the  application  of  a  system 
composed  of  direct  taxes  only ;  also  the  advantage  of 
making  the  payer  painfully  aware  of  his  burden  is 
disputed  by  some,  who  hold  that  on  the  contrary  it  is 
desirable  to  make  taxation  as  little  obvious  as  possible 
in  order  to  avoid  discontent,  resistance,  and  evasion. 

Indirect  taxes  are  duties  on  goods,  or  taxes  on  services 
and  actions,  which  are  shifted  or  passed  on  to  others. 
Thus  duties  on  imported  or  home-made  commodities 
ultimately  increase  the  cost  of  these  articles  to  the 
consumers.  Indirect  taxes  have  the  advantage  of  being 
less  obtrusive,  they  are  somewhat  obscured  in  the 
mode  of  collection,  and  so  evoke  less  opposition  than 
direct  taxes  ;  they  are  also  paid  in  small  amounts,  and 
are  therefore  less  onerous.  Indirect  taxation  can  also 
be  arranged  to  touch  all  classes  by  a  judicious  selection 
of  commodities  ;  further,  the  scheme,  while  avoiding 
prime  necessaries,  can  be  framed  so  as  to  impose 
duties  upon  popular  luxuries  ;  such  taxes  become  in 
a  certain  sense  optional,  since  any  one  may  refrain  from 
consuming  a  taxed  luxury.  The  taxes  on  comforts 
and  luxuries  have  also  much  elasticity,  that  is,  they 
increase  with  general  consumption  in  times  of  prosperity  ; 
also  a  slight  modification  in  the  rate  can  be  made  to 
meet  an  emergency  when  additional  revenue  is  required. 
Any  change  in  taxation  produces  some  economic  dis- 
location, but  small  alterations  in  the  duties  on  spirits, 
beer,  tea  or  tobacco,  are  more  tolerable  than  new 
duties. 

Various  objections  are  raised  against  indirect  taxa- 
tion :  (i)  that  it  is  not  an  easy  matter  for  the  govern- 

37 


PRINCIPLES  OF   TAXATION  [CHAP. 

ment  to  impose  a  new  tax  since  the  anticipated 
dislocation  of  trade  always  raises  a  protest ;  (2)  that 
the  collection  of  taxes  on  commodities  is  more 
expensive  and  difficult  than  direct  taxation ;  (3)  that 
it  may  inflict  an  inconvenience  upon  trade  if  the  tax 
is  levied  during  any  stage  of  the  production,  while  it 
also  increases  the  cost  to  the  consumer,  since  a  tax 
paid  in  advance  absorbs  capital  on  which  interest  will 
be  required.  Mill  notes  as  further  drawbacks  to  in- 
direct taxation,  that  the  necessity  for  advancing  large 
sums  as  taxes  tends  to  restrict  the  business  to  large 
capitals  and  thus  favours  monopoly  ;  and  that  it 
checks  improvements  in  method  if  the  tax  is  levied 
on  a  process  or  at  some  particular  stage  in  the  manu- 
facture, since  this  mode  of  determining  the  amount  of 
duty  requires  production  to  be  conducted  on  a  uniform 
system.  These  objections  can  be  met  in  some  degree 
(i)  by  restricting  indirect  taxation  to  a  limited  number 
of  articles ;  (2)  by  meeting  the  varying  demands  for 
taxation  by  slight  modifications  of  existing  taxes, 
rather  than  by  the  imposition  of  new  taxes ;  (3)  by 
placing  the  duty  only  upon  the  finished  article.  Thus 
the  beer  duty  now  replaces  the  older  tax  on  malt, 
and  the  system  of  bonding  brings  the  payment  of 
the  tax  as  near  as  possible  to  the  time  of  consumption, 
and  prevents  the  necessity  for  advancing  much  capital 
in  payment  of  taxes  on  imported  articles. 

One  of  the  greatest  defects  of  indirect  taxes  is  the 
difficulty  of  tracing  their  full  incidence ;  there  are 
unexpected  effects,  and  interests  are  touched  adversely 
which  were  not  contemplated,  while  subsidiary  in- 
dustries sometimes  suffer  an  unintentional  injustice. 
This  objection  applies  both  to  new  taxes  and  to 

38 


HI.]  DIFFICULTIES   OF  TAXATION 

any  considerable  modifications  of  old  taxes.  Every 
new  tax  creates  a  disturbance ;  price  and  demand 
are  affected ;  but  after  a  sufficient  period  of  time 
has  elapsed,  trade  and  industry  adjust  themselves 
to  unavoidable  conditions,  the  tax  loses  some  of  its 
burdensomeness,  and  prices  and  demand  are  accommo- 
dated to  the  new  circumstances.  Thus  the  continuance 
of  an  old-established  tax  which  has  obvious  defects  may 
be  a  less  evil  than  the  imposition  of  a  new  tax  which 
would  disturb  existing  relations,  even  though  the 
proposed  tax  may  conform  more  closely  to  economic 
theory ;  hence  the  maxim  that  "  an  old  tax  is  no 
tax,"  or  that  "  an  old  tax  is  better  than  a  new  one." 

To  every  tax -system  objections  can  be  raised ;  the 
problem  is  to  find  the  least  objectionable  and  most 
effective  system.  A  well-balanced  system,  combining 
direct  and  indirect  taxation,  comes  nearest  to  realising 
this  end,  and  equity  is  more  attainable  by  this  means  ;  all 
classes  may  thus  be  made  to  contribute  in  the  manner 
most  convenient  to  them,  and  to  do  so  more  nearly  in 
proportion  to  their  ability ;  the  pressure  of  taxation  is 
distributed  more  evenly  while  it  inflicts  the  minimum 
of  disturbance  on  industry. 

There  is  a  growing  tendency  to  regard  the  income- 
tax  as  the  chief  instrument  for  securing  elasticity  in 
the  British  system,  since  an  additional  penny  on  the 
income-tax  is  so  easily  imposed,  and  will  yield  about 
£2,500,000.  But  if  it  be  assumed  that  elasticity  in 
taxation  is  to  be  obtained  by  one  tax  only,  that  tax 
should  have  a  wide  incidence,  and  should,  moreover, 
not  be  unduly  burdensome  in  normal  circumstances. 
At  one  time  the  income-tax  was  regarded  as  mainly 
a  war-tax ;  it  is  now,  however,  relied  upon  as  an 

39 


PRINCIPLES   OF  TAXATION  [CHAP. 

integral  and  very  productive  element  of  ordinary 
revenue ;  but  it  falls  only  upon  a  section  of  the 
community,  and  it  is  therefore  not  equitable  that  it 
should  stand  at  a  high  rate  in  ordinary  times,  and 
also  be  treated  as  a  financial  reserve  in  time  of  war. 

It  is  important  in  any  system  of  finance  that  taxation 
should  fall  as  nearly  as  possible  upon  income  only,  and 
that  capital,  which  is  a  source  of  future  wealth,  should 
not  be  discouraged  in  its  growth  by  taxation.  It  is  a 
principle  universally  accepted  by  economists  that  taxa- 
tion should  give  the  minimum  of  interference  with 
industry,  enterprise,  and  production.  The  death  duties 
are  the  only  important  taxes  in  the  British  system  which 
fall  upon  capital ;  but  their  character  and  incidence 
are  exceptional,  and  they  provide  a  contribution  to 
equity  in  the  system,  which  is  regarded  as  a  set-off 
against  any  disturbance  of  capital  and  its  employment. 
Taxation  of  articles  of  consumption  appears  to  be  a 
taxation  of  expenditure  rather  than  income.  This  is  so 
in  the  first  place ;  since,  however,  normal  expenditure  is 
the  disbursement  of  normal  income,  the  taxes  come  out 
of  annual  income,  except  in  those  cases  of  extravagance 
where  expenditure  encroaches  upon  capital.  Taxation 
on  consumption  is  really  a  method  of  taxing  some 
incomes  or  portions  of  income  which  it  is  undesirable 
or  inconvenient  to  tax  directly.  Indirect  taxation  is 
only  one  way  of  getting  at  "ability  to  pay"  out  of 
income. 

Taxes  have  been  classified  on  various  principles ; 
one  natural  arrangement  is  upon  wealth  at  its 
acquisition,  wealth  in  possession,  and  wealth  at  con- 
sumption— i.e.,  upon  income,  capital,  and  use.  This 
method  of  grouping  taxes  is  useful  in  tracing  the 

40 


HI.]      SYSTEM    AFFECTED    BY   CIRCUMSTANCES 

economic  effects  of  taxation  upon  production,  dis- 
tribution, and  consumption  respectively ;  it  does  not, 
however,  constitute  a  scientific  classification ;  indeed, 
any  exhaustive  attempt  at  a  classification  of  taxes 
must  yield  a  cross-division,  since  the  problem  of 
taxation  is  a  complex  one,  and  involves  many  con- 
siderations. The  principle  of  justice  has  to  be  satisfied, 
the  practical  end  of  revenue  must  be  attained,  and  the 
economic  effects  upon  production  and  distribution  must 
always  be  kept  in  view.  No  scheme  of  taxation  can 
offer  a  logical  classification  or  secure  absolute  scientific 
precision  in  the  application  of  these  several  principles. 

Taxation  is  a  practical  problem,  and  not  an  enquiry 
into  an  ideally  best  system.  As  has  been  shown,  every 
existing  system  of  taxation  is  an  historic  growth  ;  it  is 
relative  to  the  conditions  of  its  evolution,  the  circum- 
stances of  the  country,  its  physical  resources  and 
environment,  the  stage  of  industrial  development,  the 
character  of  the  people,  and  their  history  and  form  of 
government.  Thus  a  system  suited  to  one  country 
may  be  quite  inapplicable  to  the  circumstances  of 
another ;  modifications  cannot  be  determined  purely 
by  the  dictates  of  abstract  theory  ;  what  is  economically 
and  politically  expedient  must  be  considered,  and  the 
history  and  sentiments  of  the  people  are  factors  in 
the  decision.  This  does  not  mean  that  principles 
differ,  but  that  the  circumstances  of  their  application 
are  different.  A  young  colony  with  a  scattered  popu- 
lation may  find  import  duties  the  most  convenient 
and  economic  mode  of  raising  revenue ;  an  income- 
tax  at  that  early  stage  of  development  would  be 
difficult  of  assessment,  and  perhaps  impossible  in 
application.  As  the  colony  develops,  other  methods 

41  F 


PRINCIPLES   OF   TAXATION  [CHAP. 

of  taxation  become  more  appropriate,  and  with  the 
higher  organisation  of  the  community  new  forms  of 
wealth  arise  which  provide  fresh  sources  of  revenue. 

The  existence  of  a  vast  variety  of  economic,  social, 
and  racial  conditions  among  the  different  components 
of  the  British  Empire  entirely  precludes  the  possi- 
bility of  an  imperial  Zollverein  or  customs-union.  The 
systems  of  taxation  in  the  mother  country,  the  self- 
governing  colonies,  dependencies,  and  Crown  colonies, 
though  based  on  the  same  fundamental  principles, 
must  exhibit  differences  in  detail  ;  justice,  economy, 
and  convenience  have  to  be  realised  in  different  sets 
of  circumstances.  An  income-tax  and  a  tax  on  beer 
may  satisfy  the  canons  in  Great  Britain,  while  a  duty 
on  salt  may  better  conform  to  economic  principles  in 
the  conditions  of  our  Indian  fellow-subjects. 

Adam  Smith's  classical  canons  have  come  to  be 
generally  accepted  as  the  recognised  rules  for  guidance 
in  taxation.  They  were  the  basis  of  the  reforms  of 
Pitt,  Peel,  and  Gladstone,  and  are  still  regarded  as 
offering  the  best  working  principles  for  constructing 
a  sound  scheme  of  taxation,  whilst  they  can  be 
supplemented  by  sundry  other  minor  maxims.  These 
canons  advance  four  regulative  principles  : — equality, 
certainty,  convenience,  and  economy. 

The  canon  of  equality,  which  embodies  the  principle 
of  justice,  states  that  "  the  subjects  of  every  State  ought 
to  contribute  towards  the  support  of  the  government 
as  nearly  as  possible  in  proportion  to  their  respective 
abilities,  i.e.,  in  proportion  to  the  revenue  which  they 
respectively  enjoy  under  the  protection  of  the  State." 
This  canon  is  fundamental,  and  it  applies  to  the  scheme 
of  taxation  as  a  whole ;  the  term  "  ought "  emphasises 

42 


in.]  CANONS  OF  TAXATION 

the  idea  of  duty  ;  the  "  support  of  the  government " 
indicates  the  political  object  of  taxation  ;  "  protection 
of  the  State "  indicates  the  services  rendered ;  while 
"  ability  to  pay "  advances  the  notion  of  equitable 
sharing  of  cost. 

The  other  three  canons  are  merely  economic  rules  to 
be  applied  separately  to  each  tax  in  order  to  secure 
productivity ;  they  have  been  called  "  administrative 
precepts,"  and  are  as  follows : 

(a)  "  The  tax  which  each  individual  is  bound  to  pay 
ought  to  be  certain  and  not  arbitrary.  The  time  of 
payment,  the  manner  of  payment,  the  quantity  to 
be  paid  ought  all  to  be  clear  and  plain  to  the  con- 
tributor, and  to  every  other  person." 

(£)  "  Every  tax  ought  to  be  levied  at  the  time  or 
in  the  manner  in  which  it  is  most  likely  to  be  convenient 
for  the  contributor  to  pay  it." 

(c)  "  Every  tax  ought  to  be  so  contrived  as  both  to 
take  out  and  keep  out  of  the  pockets  of  the  people  as 
little  as  possible  over  and  above  what  it  brings  into  the 
public  treasury  of  the  State." 

In  Great  Britain  the  Budget  system  is  a  guarantee  of 
"  certainty"  owing  to  the  publicity  and  possibility  of 
discussion  in  the  House  of  Commons  of  every  detail 
of  taxation,  and  the  sanction  which  must  be  given  by 
Parliament.  Arbitrary  taxation  is  fatal  to  production, 
it  becomes  simply  robbery  by  the  government  or  by  its 
agents.  Its  effects  were  illustrated  in  the  misery  and 
poverty  produced  by  the  methods  of  taxation  formerly 
employed  in  Egypt.  Similarly  the  faille,  a  village  land- 
tax  in  France  before  the  Revolution,  was  an  arbitrary 
and  variable  impost  on  the  possessions  of  every  culti- 
vator ;  its  extortionate  and  oppressive  character  was 

43 


PRINCIPLES   OF  TAXATION  [CHAP. 

the  cause  of  great  distress ;  it  occasioned  evasion  and 
misrepresentation,  and  kept  the  miserable  peasants 
in  a  state  of  constant  irritation  and  disaffection. 

Convenience  consists  in  securing  that  producer  and 
consumer  are  disturbed  as  little  as  possible  by  the 
time  and  method  of  demanding  the  tax.  Many  taxes, 
now  obsolete,  offended  against  this  canon  :  the  malt-tax 
interfered  with  the  processes  of  production  ;  the  hop-tax 
often  compelled  growers  to  sell  their  crops  as  soon  as 
gathered  in  order  to  pay  the  duty,  thus  overstocking 
markets  and  forcing  down  prices  to  the  advantage  of 
the  middlemen  and  the  injury  of  the  producers. 
In  modern  times  bonding  houses  secure  for  traders  a 
minimum  of  inconvenience  from  customs  and  excise 
duties,  while  payment  of  taxes  on  commodities  at  the 
time  of  purchase  is  most  convenient  for  the  con- 
sumer. Similarly  taxes  on  contracts  paid  at  the  time 
of  exchange  and  on  legacies  at  death  satisfy  the  canon 
of  convenience.  Income  -  tax  perhaps  conforms  less 
than  any  other  tax  to  this  canon,  and  its  inconvenience 
would  become  a  serious  objection  to  the  tax  if  it 
were  made  universal  and  adopted  as  a  substitute  for 
indirect  taxation. 

The  canon  of  economy  points  to  productiveness  as  the 
fundamental  fact  in  taxation  ;  the  aim  is  revenue,  and 
in  its  acquisition  the  productive  powers  of  the  com- 
munity are  not  to  be  reduced,  i.e.,  taxation  should  be 
arranged  so  as  not  to  diminish  the  efficiency  of  land, 
labour,  or  capital.  Any  system  that  wastes  the  tax 
in  collection  by  employing  a  needlessly  large  staff  of 
officials,  or  by  causing  unnecessary  expenditure  in 
production,  loss  of  time  or  annoyance  to  the  payers ; 
that  is  restrictive  in  its  methods ;  or  that  leads 

44 


HI.]  THE   CANON   OF   ECONOMY 

to  smuggling  and  evasion,  offends  against  economy. 
Generally  speaking,  indirect  taxes  are  less  economic 
in  Adam  Smith's  sense  than  direct  taxes.  Protective 
taxes  which  direct  labour  and  capital  into  less  pro- 
ductive channels,  and  raise  only  a  small  revenue  on 
the  imported  articles  in  proportion  to  their  cost  to 
the  community,  infringe  this  canon ;  their  yield  is 
small  while  their  cost  is  relatively  great,  and  the  loss 
they  occasion  in  other  directions  is  considerable. 

The  farming  of  taxes  on  commodities,  a  system  once 
common  in  Europe,  and  still  existent  in  Persia  and 
some  other  backward  countries,  is  not  productive  to 
the  State,  since  the  taxes  yield  much  less  revenue 
than  the  amounts  exacted  by  the  rapacious  inter- 
mediaries. This  method  belongs  to  an  early  stage 
of  development.  To  the  tax-payers  the  taxes  are 
uncertain  and  often  extortionate,  they  are  also  often 
collected  without  regard  to  convenience ;  the  system 
impedes  progress  and  checks  enterprise  by  its  economic 
defects,  and  thus  causes  additional  loss  to  the  payer. 

The  Gabelle,  a  tax  levied  upon  salt  in  France  for 
some  three  hundred  years  before  the  Revolution,  is  an 
example  of  a  tax  which  offended  all  the  canons  of 
taxation.  Salt  was  a  government  monopoly  maintained 
for  revenue  ;  all  classes  were  required  to  purchase  a 
minimum  amount  per  head,  while  the  State  price  was 
arbitrary  and  variable,  and  the  tax  was  often  farmed 
out  by  companies  which  made  a  profit  by  the  sale  ; 
smuggling  was  common,  and  numbers  were  unproduc- 
tively  engaged  in  the  illicit  trade,  while  many  revenue 
officers  were  wastefully  employed  in  its  repression  ;  on 
every  ground  the  tax  was  uneconomic  and  mischievous. 

The  canons  of  Adam  Smith  lay  down  the  first  condi- 

45 


PRINCIPLES  OF   TAXATION  [CHAP. 

tions  for  securing  a  productive,  just,  and  efficient  system 
of  taxation  ;  an  unjust  system  must  be  uneconomic  in 
the  long-run  since  it  discourages  industry  and  thrift, 
which  are  the  sources  of  all  wealth  and  therefore 
determine  the  possibilities  of  taxation  ;  while  arbitrary, 
uncertain,  inconvenient,  and  wasteful  methods  must 
also  ultimately  diminish  the  effective  yield  of  taxation. 
It  is  in  strict  conformity  with  the  principle  of 
justice  that  representation  and  taxation  should  accom- 
pany one  another  as  correlative  rights  and  duties. 
The  payment  of  taxes  should  entitle  the  tax-payer  to 
a  voice  in  the  imposition  of  taxation,  and  conversely 
the  right  to  determine  expenditure  entails  a  corres- 
ponding duty  of  contributing  to  the  revenue  in 
proportion  to  ability.  There  has  always  been  a 
tendency  for  the  classes  in  power  to  place  the  chief 
burden  of  taxation  upon  others,  and  this  inclination 
is  not  less  evident  now  that  the  centre  of  political 
gravity  has  been  transferred  to  the  masses ;  it  is 
exhibited  in  the  tendency  to  increase  direct  taxation 
from  which  the  majority  are  free,  and  to  reduce 
indirect  taxation  which  touches  the  multitude  more.1 

1  The  Chancellor  of  the  Exchequer,  Sir  M.  E.  Hicks-Beach,  in  his 
Financial  Statement  in  the  House  of  Commons,  1896,  remarked: 
"  The  fact  is  that  the  direct  tax-payers  have  borne  the  bulk  of 
our  new  burdens.  This  has  been  the  continuous  direction  of  our 
financial  policy  for  fifty  years.  In  1841,  the  year  before  Sir  Robert 
Peel  imposed  the  Income-tax,  I  find  that  of  every  £i  that  was 
raised  by  taxation  145.  7^d.  was  paid  by  the  consuming  classes, 
and  $s.  4|d.  was  paid  by  the  propertied  classes  ;  but  now  of  every 
£i  raised  by  taxation  los.  $d.  is  paid  by  the  consuming  classes? 
and  95.  7d.  by  the  propertied  classes. 

"  In  1841 — 2  with  a  tax  revenue  of  ^50,000,000  indirect  taxa- 
tion paid  73  per  cent,  direct  27  per  cent." 
46 


m.]  THE   CANON   OF   EQUITY 

Adam  Smith's  canon  of  equity  has  given  rise  to  much 
controversy.  He  interprets  ability  to  pay  in  terms  of 
income.  It  is  pointed  out  that  this  is  an  objective 
standard,  yielding  a  material,  tangible  thing,  a  tax, 
but  that  the  fundamental  idea  in  ability  is  "sacrifice," 
which  is  really  a  subjective  state,  a  psychical  condition, 
incapable  of  measurement  by  any  common  external 
standard.  Yet  since  taxation  is  the  matter  at  issue, 
sacrifice  must  be  translated  into  terms  of  money-taxes. 
Mill  thought  that  the  canon  of  justice  would  be  satisfied 
if  taxation  imposed  "  an  equality  of  inconvenience,"  and 
"  left  the  payers  of  taxes  relatively  in  the  same  position 
as  it  found  them."  Attempts  to  realise  this  doctrine  of 
equality  of  sacrifice  have  led  to  various  qualifications  and 
to  proposals  for  freeing  necessaries,  leaving  a  minimum 
income  untaxed,  and  for  graduating  taxes  so  as  to  place 
the  heavier  burden  upon  the  richer  classes.  These 
measures  all  present  great  practical  difficulties,  and  come 
into  conflict  with  the  principle  of  productiveness  ;  in  fact, 
the  means  for  measuring  "  equalities  of  inconvenience  " 

"  In  1861,  out  of  ,£64,000,000  indirect  paid  62  per  cent,  direct 

38  per  cent." 
"  In  1891,  out  of  ^83,200,000  indirect  paid  56  per  cent,  direct 

44  per  cent." 
"  In  1895,  out  of  ^92,482,000  indirect  paid  52  per  cent,  direct 

48  per  cent." 

"  There  has  been  a  gradual  transfer  of  burden  from  the  indirect 
to  the  direct  tax-payer.  The  result  is  that,  whereas  in  1841  j£i,  73. 
3^d.  per  head  of  the  population  was  produced  by  indirect  taxation 
and  ros.  id.  by  direct  taxation,  now  £i,  45.  gd.  comes  from 
indirect  taxation,  and  £i,  2s.  6d.  from  direct  taxation." 

In  considering  this  statement,  it  must  be  remembered  that  the 
great  fiscal  reforms  of  Peel  and  Gladstone,  by  which  the  principle 
of  "  taxation  for  revenue  only  "  was  established,  took  place  between 
1842  and  1860. 

47 


PRINCIPLES   OF   TAXATION  [CHAP. 

accurately  are  not  to  be  found,  and  only  a  very  rough 
approximation  can  be  made. 

Professor  Edgeworth's  phrase  "  minimum  of  disutility  " 
has  the  advantage  over  "  equality  of  inconvenience  "  that 
it  appeals  to  the  only  practical  test  of  value  in  the 
price  that  one  will  pay  for  the  use  of  an  article  or  for 
a  service ;  but  there  is  still  this  difficulty,  that  while  the 
final  utility  of  an  article  to  an  individual  is  determined 
by  himself  in  the  price  he  is  willing  to  give,  in  the  case 
of  taxes  imposed  by  authority  the  final  utility  (or 
disutility)  has  to  be  determined  by  an  external  power, 
the  government. 

The  interpretation  of  ability  as  "  faculty  "  seems  to  get 
rid  of  the  subjective  attitude ;  the  problem  becomes  an 
estimate  of  capacity  for  taxation,  of  which  the  criterion 
is  held  to  be  income.  This  view,  at  all  events,  excludes 
the  exemption  of  privileged  classes,  such  as  obtained  at 
one  period,  especially  in  France  before  the  Revolution  ; 
but  equality  is  still  difficult  of  attainment,  for  incomes 
are  not  independent  of  circumstances :  all  must  pay, 
but  in  what  degree? 

That  taxation  must  not  diminish  the  productive 
powers  of  society  is  a  rule  as  fundamental  as  that  of 
equity,  but  productiveness  would  suffer  if  income, 
whether  from  land,  labour,  or  capital,  be  taken  as  the 
sole  criterion  of  capacity. 

Money-income,  without  any  other  consideration,  can- 
not form  a  just  measure  of  "  ability  to  pay."  Inequalities 
in  the  conditions  which  affect  capacity  to  pay  taxes  are 
innumerable  among  persons  with  the  same  money- 
income.  Bentham,  Mill,  and  Ricardo  argued  on  this 
account  that  a  minimum  or  subsistence  income  should 
be  exempt,  as  a  man  must  live  before  he  can  pay 

48 


in.]  ABILITY   TO   PAY  TAXES 

taxes ;  they  therefore  held  that  net,  and  not  gross, 
income  should  be  the  measure  of  power  to  pay  taxes, 
for  it  is  not  economic  that  taxation  should  encroach 
upon  productive  power.  But  such  a  minimum  to  be 
just  would  need  to  be  a  variable  quantity  in  order  to 
meet  different  circumstances,  for  the  definition  of 
necessaries  must  be  relative  to  position  and  duties  in 
life ;  therefore  no  fixed  or  uniform  limit  of  exemption 
can  be  other  than  arbitrary.  But  no  income-tax, 
even  after  the  exemption  of  a  minimum,  can  secure 
distributive  justice.  A  5  per  cent,  duty  on  a  net 
income  of  ^100  is  a  far  greater  sacrifice  than  a  5  per 
cent,  duty  on  a  net  income  of  £1000.  This  difficulty 
has  suggested  a  progressive  income-tax,  but  any 
graduated  scale  must  also  be  arbitrary,  and  still  the 
practical  difficulty  remains  of  interpreting  equity  to 
different  circumstances ;  further,  it  is  objected  that  a 
heavy  tax  on  large  incomes  would  be  a  fine  upon  the 
more  thrifty  and  industrious,  and  a  check  upon  saving 
and  the  accumulation  of  capital,  and  therefore  a  sure 
means  of  defeating  the  end  of  taxation  by  reducing 
production.  The  English  income-tax  has  been  graduated 
with  a  view  to  minimising  these  defects  by  giving 
exemption  to  a  considerable  minimum  (^160),  and  also 
by  adopting  a  scheme  of  abatements  or  concessions 
which  converts  it  into  a  degressive  tax  ;  its  best  defence 
is,  however,  that  it  is  only  part  of  a  system  ;  it  touches 
only  a  fraction  of  the  community,  and  the  majority 
escape  it  altogether.  The  relatively  greater  degree  of 
indirect  taxation  paid  by  those  with  the  lower  incomes 
is  supposed  to  provide  compensation  in  the  system. 

Other  objections  are  raised  against  adopting  income 
as  a  test  of  ability — viz.,  that  it  takes  no  note  of  the 

49  G 


PRINCIPLES   OF   TAXATION  [CHAP. 

nature  of  the  source  of  the  income,  whether  from 
permanent  investments  or  from  temporary  and  uncertain 
earnings,  out  of  which  savings  should  be  made  for  old 
age  and  contingencies.  A  very  partial  recognition  of 
this  cause  of  inequality  is  made  by  the  exemption 
from  income-tax  of  premiums  on  insurance ;  but  many 
other  forms  of  saving  are  equally  worthy,  yet  the 
application  of  exemption  to  all  of  these  seems  impracti- 
cable. Again,  before  income  can  measure  equality  of 
sacrifice,  there  should  be  some  consideration  of  the 
special  circumstances  of  individuals — the  size  of  family 
for  equal  incomes,  and  the  very  different  claims  upon 
individuals  which  arise  from  social  position  and  duties, 
also  the  health  and  probable  length  of  working  life  of 
the  earner  of  the  income,  and  other  circumstances  which 
may  render  his  income  more  or  less  precarious.  From 
considerations  of  these  inequalities  it  is  conclusive  that 
income  alone,  even  with  the  exemption  of  a  minimum, 
is  no  reliable  test  of  capacity  to  pay.  Mathematical 
equality  is  very  far  from  attainable,  and  to  secure  any 
approximation  to  objective  equity  in  a  working  system, 
various  modes  of  taxation  must  be  combined. 

Consumption  has  been  suggested  as  a  better  test  of 
ability  and  as  the  sole  basis  of  taxation  ;  but  taxation 
on  expenditure  alone  would  be  very  inequitable,  and  it 
is  scarcely  practicable  in  a  complex  civilisation ;  the 
machinery  requisite  for  its  collection  would  be  most 
elaborate  and  expensive,  since  duties  would  have  to  be 
placed  upon  very  many  kinds  of  consumption.  It 
would  be  necessary  also  to  define  consumption,  and  to 
determine  whether  wealth  expended  in  promoting  an 
industry  (which  is  capital)  should  be  taxed,  or  whether 
personal  expenditure  only  should  pay  ;  the  difficulty  of 

5° 


in.]  TAXATION   OF   CAPITAL 

discriminating  these  cases  would  be  immense.  Evasion 
would  be  extensive,  wealth  not  utilised  would  escape 
taxation,  consumption  would  be  discouraged,  and  as  a 
consequence  production  would  diminish.  Necessaries, 
as  the  most  pressing  form  of  consumption,  would  be 
unfairly  burdened,  and  the  man  whose  entire  earnings 
were  expended  on  mere  subsistence  would  pay  on  his 
whole  income,  thus  the  burden  of  such  taxation  would 
be  most  severe  on  the  least  able.  The  tax  system  of 
Great  Britain  a  century  ago  was  fairly  representative 
of  the  working  of  this  principle. 

Again,  it  has  been  proposed  to  limit  taxation  to 
realised  wealth.  But  this  would  in  effect  impose  a 
penalty  on  saving,  and  would  tend  to  reduce  capital ; 
the  prudent  would  suffer,  the  wasteful  and  extravagant 
would  escape.  Such  a  system  would  be  futile  and 
self-destructive,  since  it  would  check  production,  and 
cut  off  revenue  at  its  source ;  employment  would  be 
diminished  and  the  need  for  taxes  would  increase  while 
the  means  for  obtaining  them  were  being  reduced,  and 
other  methods  of  raising  revenue  would  ultimately  have 
to  be  adopted. 

A  tax  is  called  Proportional  when  the  rate  is  uniform 
on  all  incomes  and  quantities ;  the  tax  becomes  a 
percentage  and  is  proportionate  to  the  amount  taxed. 
The  income-tax  (ignoring  abatements)  is  a  proportional 
tax  since  it  exacts  the  same  rate  per  £,  on  all  incomes. 
The  proportional  principle  is  recommended  by  its 
simplicity  and  by  its  easy  application  ;  it  is  objected, 
however,  that  it  does  not  yield  equality,  and  that 
larger  incomes  can  afford  relatively  greater  deductions 
than  the  proportional  method  applies. 

Graduated  Taxation  has  been  advocated  as  a  means 

5* 


PRINCIPLES   OF  TAXATION  [CHAP. 

for  realising  more  nearly  the  principle  of  equality ; 
there  are  several  forms,  one  or  other  of  which  has 
been  adopted  in  the  assessment  of  income-tax  by 
different  countries. 

In  Progressive  Taxation  a  graduated  scale  is  adopted, 
the  rate  of  taxation  increasing  as  the  amount  assessed 
increases ;  the  principle  is  best  illustrated  by  the 
Estate  duty,  which  is  graduated  on  a  scale  of  twelve 
steps,  commencing  at  I  per  cent,  on  ;£ioo  and  attain- 
ing a  maximum  of  8  per  cent,  on  .£1,000,000.  The 
Inhabited  House  duty  is  another  example  of  moderate 
graduation.  The  argument  for  graduation  is  based  on 
the  theory  of  .diminishing  utility  ;  it  is  urged  that 
sacrifice,  like  utility,  diminishes  with  each  additional 
increment  of  wealth  after  some  point  has  been  reached, 
and  that,  therefore,  a  greater  percentage  deduction 
from  large  incomes  will  exact  no  more  sacrifice  than  a 
smaller  percentage  does  in  the  case  of  small  incomes. 
It  is  objected  that  any  system  of  graduation  must  be 
arbitrary ;  that  the  increased  rate  of  taxation  is  a  form 
of  appropriation  of  property  which  is  adverse  to  thrift 
and  production  ;  and  that  the  method  is  open  to  abuse, 
and  may  be  employed  for  purposes  of  confiscation  of 
wealth  by  merely  increasing  the  rate  in  the  upper 
scale.  It  is  also  maintained  that  the  system  tends  to 
encourage  evasion  and  false  returns,  and  that  it  may 
lead  to  a  diminution  of  wealth  by  checking  saving, 
or  by  causing  the  emigration  of  capital  to  countries 
offering  greater  security  for  its  enjoyment. 

On  the  whole  the  argument  for  graduation  on  a 
rational  and  moderate  scale  seems  to  be  valid  ;  it  helps 
to  satisfy  the  demands  of  equity  and  productiveness,  if 
the  principle  be  limited  in  its  application  to  a  few 

52 


in.]  GRADUATED   TAXATION 

direct  taxes  in  a  mixed  system.  As  regards  the  Estate 
duty,  the  ability  to  pay  is  unquestionably  greater  in 
the  case  of  larger  legacies,  and  it  is  just  that  their 
contributions  to  taxation,  though  considerable,  should 
be  also  at  a  higher  rate. 

Once  more  we  must  recall  the  fact  that  in  Great 
Britain  taxation  is  an  aggregate,  and  the  Death  duties 
are  only  a  fraction  of  a  system  which  has  to  be 
considered  as  a  whole ;  the  graduation  of  this  tax 
tends  to  counterbalance  inequalities  in  other  parts 
of  the  scheme.  It  is  compensatory  to  possible  over- 
weighting of  the  indirect  factors  in  taxation,  and 
it  is  an  attempt  by  manipulation  of  parts  to  obtain 
that  balance  of  equity  which  no  human  skill  can  wholly 
satisfy,  but  which  the  problem  of  taxation  imposes  upon 
governments. 

Taxation  may  also  be  graduated  on  a  regressive 
principle,  that  is,  the  rate  may  be  graduated  so  as  to 
decrease  as  the  assessed  amount  increases ;  this  form 
is,  however,  rare  in  practice,  though  it  found  illustra- 
tion in  the  French  poll  and  hearth  taxes  in  the 
fourteenth  century  when  the  poorer  classes  paid  at 
the  higher  rates. 

Degressive  Taxation  is  the  term  applied  to  the  method 
which  exempts  a  limited  amount  of  income  from  taxa- 
tion, and  provides  a  graduated  scheme  of  abatements 
exempting  portions  of  income  up  to  some  point,  above 
which  level  the  tax  is  levied  on  the  full  income ;  the 
rate  is  uniform.  The  plan  is  well  illustrated  by  the 
British  income-tax: — incomes  up  to  £160  are  free; 
there  is  an  abatement  of  £160  on  incomes  not 
exceeding  £400;  of  £150  on  incomes  above  £400 
and  not  exceeding  £500;  of  .£120  on  incomes  above 

53 


PRINCIPLES   OF  TAXATION  [CHAP. 

£500  and  not  exceeding  .£600 ;  of  £70  on  incomes 
above  £600  and  not  exceeding  £700 ;  incomes  above 
£700  pay  on  the  full  amount. 

A  progressive  tax  cannot  be  easily  applied  to  com- 
modities ;  the  attempt  would  be  costly,  unsatisfactory, 
and  unproductive.  Again,  a  progressive  tax  on  the 
products  of  large  industries  would  operate  to  counteract 
the  law  of  increasing  returns,  and  would  thereby  cause 
an  economic  loss.  Applied  to  incomes  a  progressive 
tax  cannot  secure  political  justice ;  no  calculus  can 
yield  a  scale  which  will  measure  the  relative  sacrifices. 
The  scale  could  easily  be  arranged  so  as  to  appropriate 
a  large  part  of  income  and  thus  level  down  incomes. 
Its  effects  would  be  to  destroy  the  springs  of  industry 
and  thrift,  to  cut  down  production,  lead  to  the  emigra- 
tion of  capital,  and  check  economic  progress.  The  tax 
would  fall  heavily  on  the  few,  and  would  touch  the 
majority  only  in  its  after-effects.  Such  a  tax  could 
not  be  relied  upon  to  yield  a  permanent  and  adequate 
revenue  ;  while  infringing  the  canon  of  equity  it  would 
fail  in  the  economic  aim  of  steady  productiveness, 
which  is  a  first  desideratum  in  a  scheme  of  national 
taxation.  Nor  can  it  be  too  frequently  repeated  that 
taxation  should  not  check  productiveness  by  discourag- 
ing industry  or  saving ;  for  out  of  the  products  of 
industry  alone  can  taxes  be  paid. 

The  canons  of  Adam  Smith  may  be  supplemented  by 
minor  rules,  most  of  which  really  follow  as  corollaries 
from  the  principles  of  equity  and  economy,  and  are 
a  restatement  of  points  which  emerge  from  this 
discussion. 

(i)  A  system  of  taxation  should  be  simple,  plain, 
and  intelligible  to  the  common  understand- 
54 


!„.]  SUPPLEMENTARY    RULES 

ing,  and  the  general  incidence  should  be 
traceable  with  some  degree  of  certainty. 
The  primary  necessaries  of  life  should  be 
free ;  taxation  of  commodities  should  be 
restricted  to  those  which  are  less  essential, 
and  preferably  to  luxuries. 

(2)  Taxation  should  interfere  as  little  as  possible 

with  the  processes  of  industry  ;  it  should  fall 
on  net  income,  and  be  such  as  not  to  check 
the  growth  of  capital  or  cause  it  to  migrate. 

(3)  The  system  should  provide  for  elasticity :  that 

is,  annual  revenue  should  be  able  to  be 
adjusted  easily  to  annual  demand.  This  is 
better  attained  by  modification  of  existing 
taxes  than  by  imposing  new  taxes. 

(4)  A  system  combining  both  direct  and  indirect 

taxation  is  desirable,  both  on  grounds  of 
equity  as  a  method  of  reaching  all  classes, 
and  as  affording  various  means  for  easy 
modification  and  ready  adaptation  to 
emergencies. 

(5)  Frequent  modification  of  taxes  on  commodities 

is  undesirable,  since  every  change  creates 
dislocation  ;  old  taxes  will  have  led  to 
accommodation,  new  taxes  touch  many 
interests  indirectly.  This  has  been  called 
the  canon  of  certainty  in  the  form  of  stability. 


55 


CHAPTER   IV 

DIRECT   TAXATION — TAXES   ON    PROPERTY   AND 
INCOME 

THE  revenue  of  the  sovereign  was  in  early  times 
derived  mainly  from  the  land.  In  the  Anglo-Saxon 
period  the  royal  demesne  was  the  chief  source  of 
revenue ;  while  occasional  taxes  were  levied  for 
"defence,  such  as  ship-money,  Danegeld,  and  hearth- 
money.  Danegeld,  interesting  as  the  first  English 
money-tax,  was  a  tribute  raised  to  buy  off  Danish 
invaders  ;  later  it  grew  into  a  customary  levy  on  land, 
and  was  continued  down  to  the  end  of  the  twelfth 
century.  The  royal  demesne  was  much  increased  at 
the  Norman  Conquest,  and  was  frequently  added  to 
afterwards  by  forfeitures  and  escheats.  The  feudal 
lords  paid  military  and  other  service  for  their  lands  ; 
these  services  were  commuted  at  a  later  period  into 
money-payments.  The  inferior  tenants  also  paid  service 
to  their  lords  for  the  lands  they  held,  and  this  also  was 
commuted  into  a  money-payment  in  course  of  time. 
Irregular  contributions  to  revenue  for  special  purposes 
were  obtained  by  the  demands  of  the  king  for  "  aids  " 
or  "  supplies "  from  his  tenants  and  from  the  towns 
on  the  demesne.  In  the  fourteenth  century  these 
"aids"  were  replaced  by  a  system  of  taxes  on 

56 


CHAP,  iv.]  GROWTH   OF    DIRECT   TAXATION 

"  movables "  granted  by  Parliament.  These  contribu- 
tions became  established  as  a  kind  of  property-tax 
under  the  name  of  "  fifteenths  and  tenths,"  representing 
an  estimated  proportion  of  the  value  of  such  taxable 
property ;  the  former  were  grants  from  the  counties, 
levied  upon  the  estimated  value  of  cattle  and  crops ; 
the  latter  were  grants  from  the  towns,  levied  upon  the 
capital  value  of  stock-in-trade  and  chattels.  In  1334 
a  special  enquiry  was  made  by  Parliament  for  better 
determining  and  assessing  these  grants,  and  the  system 
was  revised  by  fixing  upon  a  total  sum  which  was 
apportioned  to  the  towns  and  counties  ;  with  modifica- 
tions this  species  of  subsidy,  levied  by  assessment  on 
localities,  and  collected  by  a  kind  of  rate  on  property, 
was  continued  until  the  seventeenth  century. 

Meanwhile  another  mode  of  raising  revenue  by 
means  of  a  poll-tax  had  been  devised ;  this  was  a 
personal  tax  graduated  according  to  status,  and 
supposed  to  be  proportioned  roughly  to  the  taxable 
capacity  of  the  contributors,  as  measured  by  their  rank 
and  income.  The  poll  -  tax  was,  in  fact,  an  early  but 
somewhat  arbitrary  form  of  income  and  property-tax, 
oppressive  in  its  incidence,  and  very  unpopular ;  its 
injustice  had  a  part  in  precipitating  the  Peasants' 
Revolt  of  1381.  A  similar  tax  was  authorised  by 
Parliament  in  1435  l ;  later,  under  the  Tudor  sovereigns, 
it  was  replaced  by  "subsidies"  charged  on  rent  and 

1  The  speaker,  John  Bowes,  proposed  what  may  be  called  a 
genuine  graduated  income-tax,  arranged  in  three  schedules.  The 
minimum  taxable  income  derived  from  manor  lands,  tenements 
rents,  annuities,  etc.,  was  ^5  a  year.  The  tax  was  rated  at  6d.  in 
the  £  from  ,£5  to  .£100  ;  8d.  in  the  £  from  ^100  to  ^400,  and  2s.  in 
the  £  above  ,£400. 

57  H 


DIRECT  TAXATION  [CHAP. 

movable  property,  which  supplemented  the  grants  of 
"  fifteenths  and  tenths."  These  grants  of  subsidies 
for  extraordinary  expenditure  continued  until  1663, 
when  they  had  ceased  to  be  a  productive  source  of 
revenue  ;  the  last  yielded  only  .£282,000,  and  hence- 
forth they  were  displaced  by  special  assessments.  At 
intervals  the  poll-tax  or  capitation  grant  was  revived  to 
meet  the  special  expenses  of  war ;  at  the  Restoration, 
and  in  1666  and  1677,  a  poll-tax  was  levied  by  assess- 
ment made  on  voluntary  declaration,  and  again  between 
1689  and  1698  the  increased  revenue  required  for  the 
war  with  France  was  partly  met  by  a  poll-tax.  Its 
special  recommendation  was  that  it  was  easily  assessed 
and  collected,  but  it  was  often  evaded,  and  was 
becoming  so  little  productive  that  after  1698  it  was  not 
repeated. 

Under  the  Commonwealth  Parliament  raised  revenue 
from  both  real  and  personal  property  by  "  monthly 
assessment."  This  was  a  kind  of  subsidy,  collected 
locally  for  the  purposes  of  the  Civil  War,  and  supple- 
mented by  the  old  port  duties,  tunnage,  poundage,  etc. 
Then,  copying  a  practice  which  prevailed  in  Italy  and 
Holland,  Parliament  introduced  a  new  tax,  an  excise 
upon  home  -  produced  commodities  —  beer,  ale,  cider, 
articles  of  dress,  etc.  At  first  this  excise  was  very 
unpopular,  but  it  was  declared  by  Parliament  in  an 
ordinance  of  1649  to  be  "the  most  equal  and  indifferent 
levy  that  could  be  laid  on  the  people." 

At  the  Restoration  in  1660  the  Crown  Revenue  was 
fixed  at  ;£i,2OO,ooo;  this  was  raised  mainly  from  three 
sources:  (i)  the  customs  or  old  port  duties;  (2)  the 
new  excise,  which  was  taken  in  lieu  of  obsolete  feudal 
duties  abolished  in  1645  and  the  old  royal  prerogatives 

58 


iv.]  REVENUE   IN   17TH   CENTURY 

of  purveyance,  etc.,  and  it  was  called  the  Hereditary 
Excise ;  (3)  a  temporary  excise  which  practically  dupli- 
cated the  Hereditary  Excise. 

A  new  kind  of  House  duty  called  Hearth-money  was 
introduced  in  1662,  that  somewhat  resembled  an  income- 
tax,  being  based  upon  the  number  of  fire-places  in  a 
house,  which  number  was  supposed  to  afford  a  fair 
index  of  income.  The  tax  was  rigorously  exacted  by 
the  "  chimney-men "  who  farmed  it ;  owing  to  their 
inquisitorial  methods  it  was  very  unpopular,  and  it 
was  repealed  by  William  III.  at  his  accession,  when 
it  realised  £200,000.  An  instructive  indication  of  the 
progress  in  commerce,  and  the  growth  of  the  Credit 
System  in  this  country  is  afforded  by  a  tax  on  bankers, 
instituted  in  1670,  which  yielded  .£800,000. 

A  new  settlement  of  revenue  became  necessary  at 
the  Revolution  of  1688  ;  practically  little  revenue  was 
now  raised  from  the  old  Crown  demesne,  and  the  new 
excise  and  port  duties  had  become  the  chief  sources 
of  revenue.  The  Civil  List  was  therefore  established 
as  a  definite  fund  for  the  maintenance  of  the  Royal 
Household,  the  expenses  of  judges,  ambassadors,  etc., 
and  for  the  support  of  the  annuitants  and  pensioners 
of  the  Crown  ;  the  amount  was  fixed  first  at  .£600,000. 
The  Civil  List,  so  instituted,  was  afterwards  increased 
in  amount,  and  was  voted  henceforth  to  each  sovereign 
on  accession  to  the  throne.  Since  1787  it  has  been 
charged  upon  the  Consolidated  Fund.  In  1830  the 
expenses  of  justice,  etc.,  were  provided  for  separately, 
and  the  Civil  List  has  now  reference  only  to  the  main- 
tenance of  the  "  Dignity  and  State  of  the  Crown,"  and 
amounts  at  the  present  time  to  ^"470,000. 

In  1692  what  is  now  known  as  The  Land  Tax  came 

59 


DIRECT   TAXATION  [CHAP. 

into  existence.  This  tax  was  intended  as  a  substitute 
for  the  "  Monthly  Assessments  "  commenced  during  the 
Civil  War,  and  was  both  a  property  and  an  income 
tax  ;  it  was  a  sort  of  lineal  descendant  of  the  old 
"  Tenths  and  Fifteenths."  The  tax  was  assessed  at 
43.  in  the  £  on  the  annual  value  of  all  land  and  houses, 
on  personalty  of  every  kind,  on  the  stipends  of  public 
officials,  and  on  movables  (goods  and  chattels).  It 
was  voted  annually,  and  yielded  at  first  £1,922,712; 
but  the  annual  assessment  was  found  difficult,  and  the 
results  proved  very  variable  ;  therefore  Parliament  in 
1697  revised  the  system,  and  decided  to  raise  a  fixed 
amount  of  about  £1,500,000  by  assessing  the  quota 
to  be  raised  in  the  various  counties  and  towns  on 
the  then  valuation.  This  method  of  assessment  became 
a  source  of  great  inequality  of  incidence,  which  was 
vastly  augmented  by  the  subsequent  growth  of  popu- 
lation, and  especially  after  the  Industrial  Revolution, 
with  its  development  of  new  manufacturing  and 
commercial  districts  and  towns. 

At  a  very  early  period  in  its  history,  the  portion  of 
the  tax  assessed  on  personal  property  declined,  and 
in  course  of  time  fell  out  of  the  assessment;  in  1833 
it  was  formally  repealed,  leaving  only  the  tax  upon 
land.  The  land-tax  continued  to  be  voted  annually 
until  1798,  when  Pitt,  under  stress  of  financial  difficulty 
in  raising  funds  for  the  war,  revised  the  tax  and  con- 
verted it  into  a  perpetual  rent-charge  or  permanent 
claim  of  the  State  upon  the  rent  of  each  district ;  the 
quota  thus  came  to  be  interpreted  as  representing  a 
right  of  the  State  in  the  land.  The  capital  value  of 
the  land-tax  at  this  revision  has  been  estimated  at 
£70,000,000.  Pitt  at  the  same  time  provided  as  an 

60 


iv].  THE   LAND  TAX 

alternative  a  power  of  redemption  of  the  tax  by 
payment  of  the  capital  value.  Half  a  million  was 
redeemed  in  the  course  of  a  few  years,  and  during 
the  following  century  about  half  the  tax  was  redeemed, 
the  total  being  thus  reduced  to  £986,000  from  the 
lands  still  chargeable. 

The  land-tax  again  came  under  revision  in  1896. 
At  this  time  the  rent-charge  realised  less  than  is.  in 
the  £  on  the  whole  valuation,  and  the  incidence  was 
most  unequal,  varying  from  a  fraction  of  a  penny  in 
the  £  in  some  populous  parts,  to  nearly  43.  in  a  few 
rural  districts.  The  charge  averaged  2d.  for  Lancashire, 
3|d.  for  Durham,  2s.  id.  for  Bedfordshire,  and  43.  for 
some  parts  of  Essex.  Viewed  as  a  tax,  the  rent-charge 
presented  in  1896  many  inequalities;  much  land  was 
wholly  exempt,  the  tax  having  been  redeemed ;  a 
large  proportion  of  the  land  subject  to  the  tax  had 
changed  ownership ;  and,  as  in  each  case  it  had  been 
purchased  at  the  reduced  capital  value  which  the 
charge  produced,  the  tax  imposed  no  burden  upon 
existing  owners.  By  no  method  could  the  charges 
be  equalised,  nor  could  they  be  said  to  constitute  a 
true  tax  upon  land.  The  principle  was  adopted  that 
the  rent-charge  represented  ancient  national  rights 
of  property  in  the  land,  and  that  in  fact  such  land 
was  a  matter  of  joint-ownership,  as  in  the  analogous 
case  of  land  subject  to  tithes.  By  the  Finance  Act 
of  1896  it  was  enacted  that  the  charge  should  in  no 
case  exceed  is.  in  the  £  on  the  valuation,  and  that 
any  sum  in  excess  should  be  remitted,  thereby  making 
in  effect  a  free  gift  from  the  community  to  the  land- 
owners of  the  capital  value  of  that  portion  of  the 
rent-charge.  It  was  also  enacted  that  in  cases  where 

61 


DIRECT  TAXATION  [CHAP. 

the  tax  realised  less  than  id.  in  the  £  on  the 
valuation,  it  should  be  paid  at  the  rate  of  id.,  and 
the  excess  should  be  applied  to  the  redemption  of 
that  quota.  Other  exemptions  were  made  in  1898  in 
favour  of  owners  whose  incomes  were  less  than  £160 
and  ^400.  These  exemptions  reduced  the  yield  by 
about  .£200,000,  and  left  the  average  rate  over  the 
whole  country  at  4d.  in  the  £,. 

As  a  source  of  revenue  the  so-called  land-tax  has 
now  little  importance  ;  its  interest  resides  in  its  history, 
and  the  principles  which  it  illustrates.  Its  present 
yield,  only  £7 50,000,  is  insignificant  for  a  tax  raised 
from  the  soil ;  the  administration  is  relatively  costly, 
and  its  extinction  would  seem  desirable.  Various  plans 
have  been  suggested  for  hastening  the  process ;  one 
of  the  most  feasible  is  that  a  triple  assessment  should 
be  made  annually,  and  that  two-thirds  of  the  amount 
collected  should  be  applied  as  a  sinking  fund  for  the 
redemption  of  the  tax  in  ten  years.  This  would  give 
twenty  years'  purchase  for  a  kind  of  forced  redemption 
spread  over  ten  years  ;  the  capital  would  be  applied  to 
the  reduction  of  the  National  Debt.1  This  proposal 
seems  to  conflict  with  no  economic  principle,  and  is 
consistent  with  the  past  history  of  the  Land  Tax. 
The  extinction  of  the  tax  would  remove  a  cause 
of  much  misconception  on  the  part  of  those  who, 
unacquainted  with  its  history,  advocate  its  increase 
for  the  purpose  of  appropriating  "the  unearned  incre- 
ment."2 As  the  proposer  of  this  scheme  remarks, 

1  Economic  Journal,  September  1905. — A.  Hook,  on  "The 
Present  Position  of  the  Land  Tax." 

-  See  chapter  on  "  Local  Taxation "  for  a  statement  of  this 
problem. 

62 


iv.]  THE   LAND  TAX 

had  Pitt  instituted  a  rate  instead  of  a  fixed  charge, 
with  the  enormous  increase  in  the  value  of  property 
during  the  past  century,  it  might  have  become  the 
source  of  a  considerable  national  revenue,  and  would 
have  accomplished  the  solution  of  that  recurrent  and 
difficult  question  of  the  "  unearned  increment."  Such 
a  tax  would  have  had  other  and  important  effects 
upon  landownership  and  the  development  of  agri- 
culture and  industry,  upon  the  investment  of  capital 
in  land,  and  upon  the  "  income  and  property "  tax  in 
its  relation  to  land. 

Rent  of  land,  like  other  forms  of  income,  pays 
income-tax.  Schedule  A  (lands,  tenements,  etc.) 
yielded,  according  to  the  Finance  Accounts  for  1904-5, 
^£7, 815,913  property  -  tax  on  lands  and  houses,  of 
which  about  one-fourth  was  contributed  by  the  tax 
on  rent  of  land.  Lands  and  buildings  also  form  the 
basis  of  assessment  for  local  rates  ;  these  amount  to 
over  £50,000,000,  and  of  this  sum  land  contributes 
more  than  one-fifth. 

The  modern  Income-tax,  as  we  have  seen,  has  been 
evolved  from  the  earlier  poll-tax.  It  is  a  direct  tax 
based  on  the  total  income  of  the  payer  from  all 
sources,  and  is  graduated  on  a  special  system  of 
exemptions  and  abatements ;  as  now  levied,  it  was 
first  imposed  by  Pitt  in  1799  for  purposes  of  war,  and 
it  then  yielded  ,£6,000,000.  In  1801,  after  the  Peace 
of  Amiens,  the  tax  was  suspended,  but  it  was  reim- 
posed  in  1803  as  a  property  and  income  tax  under 
five  classes  or  schedules.  Incomes  under  £60  were 
exempt,  and  there  was  an  abatement  on  incomes 
between  £60  and  .£150;  the  rate  also  varied  from 
3d.  to  i  id.  on  incomes  under  £150;  above  that  sum 

63 


TAXES  ON   PROPERTY   AND   INCOME    [CHAP. 

the  rate  was  is.  in  the  £ ;  the  rate  was  afterwards 
increased,  until  in  1807  it  reached  2s.  in  the  £,  or 
10  per  cent.  When  the  tax  was  repealed  in  1816,  at 
the  close  of  the  war,  it  realised  £15, 500,000. 

In  1842  Sir  Robert  Peel  reintroduced  the  income- 
tax  as  a  peace  tax  in  order  to  meet  anticipated  losses 
of  revenue  from  temporary  reductions  in  import  duties 
arising  out  of  his  reforms.  The  tax  was  levied  on 
incomes  above  £150  at  /d.  in  the  £,  and  was  imposed 
for  three  years;  it  was  then  renewed  and  from  1846 
became  a  recognised  part  of  the  tax  system,  displacing 
import  duties  of  a  partially  protective  character.  The 
minimum  of  exemption  has  been  varied  several  times ; 
from  1853  to  1875  it  was  £100;  it  now  stands  at 
£160.  The  principle  of  graduation  is  applied  by 
means  of  abatements  which  have  been  extended  at 
intervals;  the  latest  modification,  adopted  in  1898, 
allows  abatements  up  to  £700,  above  which  amount 
there  is  no  abatement.  The  rate  per  £  is  uniform. 

Although  the  modern  income-tax  commenced  as  a 
war-tax,  it  has  now  become  an  established  element 
in  the  British  tax  system,  and  democratic  tendencies 
strengthen  its  position.  It  is  relied  upon  to  yield 
some  £30,000,000  of  taxation.  Only  once  since  1843 
has  it  been  proposed  to  abolish  the  tax ;  this  was  by 
Mr  Gladstone  in  1874.  It  is  regarded  as  a  national 
reserve,  and  is  always  increased  to  meet  special  war 
expenditure.  The  rate  has  varied  from  5d.  in  1853 
to  is.  4d.  during  the  Crimean  War  in  1856,  and  from 
2d.  in  1874  to  is.  3d.  in  1902  during  the  South  African 
War.  In  1905  it  stood  at  is.  in  the  £,  or  5  per  cent, 
on  fully  assessed  incomes  in  a  time  of  peace.  In  1 843 
each  penny  yielded  £500,000;  for  the  year  1904-5  the 

64 


iv.]  INCOME   TAX 

yield  per  penny  was  ^2,604,000.  The  highest  revenue 
ever  raised  by  the  income-tax  was  £38,800,000  in  the 
year  1902-3,  when  the  rate  was  is.  3d. 

Income-tax  payers  are  classed  under  five  heads  or 
schedules,  as  (a)  owners  of  property,  land,  and  houses, 
(£)  farmers  and  occupiers  of  land,  (c)  fund-holders, 
(d]  receivers  of  interest,  profits,  and  earnings  from 
business  or  investments,  (e)  recipients  of  salaries  from 
public  sources. 

The  method  of  collection  is  simple  and  economic, 
and  dividends  on  investments  pay  in  bulk  at  the 
source ;  the  tax  is  highly  productive,  and  it  can  be 
easily  modified  to  give  elasticity  of  revenue.  The  tax 
satisfies  fairly  the  canons  of  Adam  Smith ;  it  is  con- 
sidered equitable  as  forming  only  part  of  a  system  ; 
further,  it  grants  immunity  to  small  incomes,  and  is 
so  graduated  as  to  ease  the  pressure  on  moderate 
incomes.  There  is  no  doubt,  however,  that  it  presses 
with  greatest  severity  on  the  lower  grades  of  pro- 
fessional earnings  and  salaries,  and  it  has  been 
suggested  that  the  limit  of  exemption  should  be 
fixed,  as  in  Germany,  at  a  lower  sum,  so  as  to 
include  regular  incomes  of  much  less  than  £160. 
There  are  great  practical  difficulties,  however,  in  the 
administration  of  an  income-tax  on  a  more  extended 
scale,  and  others  would  arise  in  devising  machinery  to 
secure  economic  collection  and  certainty  of  payment 
from  the  weekly-wage  classes. 

Regarded  singly,  the  income-tax  can  never  be 
wholly  equitable.  The  ability  of  individuals  to  pay 
is  modified  by  many  circumstances  —  age,  health, 
family,  permanence  or  precariousness  of  income,  and 
the  need  to  make  provision  for  the  future — all  of 

65  i 


TAXES   ON   PROPERTY   AND   INCOME    [CHAP. 

which  are  incommensurable.  The  real  test  of  ability 
to  pay  is  capacity  to  spend,  and  of  this  there  can  be 
no  adequate  common  measure.  The  incidence  of  the 
income-tax  is  upon  the  payer,  whether  his  revenue 
consists  of  rent,  profits,  or  wages,  and  it  cannot  be 
directly  shifted  ;  it  diminishes  the  power  of  the  taxed 
individual  to  spend  by  the  amount  it  appropriates, 
and  only  in  so  far  as  it  has  a  tendency  to  reduce  his 
industry  and  earnings  can  it  be  properly  said  to  affect 
other  members  of  the  community.  A  very  burdensome 
rate  might  probably  produce  this  effect,  but  a  small 
tax,  forming  only  part  of  a  system,  places  no  appreci- 
able check  on  the  growth  of  income  in  a  country 
where  the  various  motives  to  acquire  wealth  are  so 
strong  as  they  are  in  Great  Britain. 

The  income-tax  is  very  easily  manipulated  by  an 
alteration  in  the  rate  to  meet  exigencies,  and  its  yield 
can  be  approximately  estimated.  The  steady  increase 
in  the  amount  assessed  for  income-tax  affords  a  very 
fair  test  of  the  growth  of  wealth  of  a  country,  and  it 
has  been  uniformly  advancing  over  many  years  in  the 
United  Kingdom,  notwithstanding  a  large  increase  in 
the  rate ;  this  fact  is  illustrated  in  the  increased  yield 
per  penny. 

Few  countries  have  copied  the  British  system  of 
income-tax,  although  many  have  adopted  some  kind 
of  graduated  tax  on  property  or  earnings.1  The  United 
States  employed  the  income-tax  as  a  temporary  ex- 
pedient during  the  Civil  War,  and  continued  it  during 
the  reduction  of  the  debt  until  1872.  An  attempt  was 

1  See  Report  (cd.  2587)  on  Graduated  Income-taxes  in  Foreign 
States,  issued  August  1905,  for  a  full  account  of  these  systems,  and 
Return  196  for  the  account  of  colonial  systems. 

66 


iv.]  INCOME   TAX 

made  in  1893  to  introduce  it  as  a  permanent  federal 
tax  of  2  per  cent,  on  incomes  above  £800  a  year, 
but  it  was  ruled  by  the  Supreme  Court  to  be 
unconstitutional.1  In  France  various  attempts  have 
been  made  to  introduce  a  general  and  progressive 
income-tax,  but  as  yet  it  has  not  been  accepted. 
The  French  have,  however,  sundry  direct  taxes  which 
form  a  kind  of  equivalent ;  these  are  a  fixed  per- 
centage on  incomes  from  land,  a  tax  (called  Patente) 
on  trades  and  professions  based  on  a  general  estimate 
of  profits  in  those  occupations,  a  tax  on  buildings, 
doors,  and  windows,  according  to  size  and  number, 
which  are  regarded  as  a  measure  of  taxable  income,  and 
a  tax  on  personalty  in  the  form  of  a  4  per  cent,  duty 
on  incomes  from  securities  other  than  State  funds. 

Belgium,  Russia,  Portugal,  and  Hungary  have  no 
proper  income-tax.  The  federated  European  states 
(Germany  and  Switzerland)  employ  indirect  taxes 
(customs,  etc.)  for  purposes  of  federal  expenditure,  but 
the  various  component  states  and  cantons  make  use  of 
taxes  on  income  for  local  purposes,  and  in  some  form 
or  other  most  of  the  other  Continental  states  have 
adopted  a  tax  on  incomes  as  part  of  their  fiscal  system. 
In  every  case  the  scheme  is  more  complicated  than 
the  British,  and  the  tax  affects  a  much  larger  section 
of  the  population.  The  maximum  exempted  is  usually 
less  than  ^50 ;  in  Prussia,  e.g.,  it  is  ,£45,  while  all 
incomes  are  liable  in  Spain  and  Italy ;  the  schemes 
are  graduated  by  various  complex  methods,  which  pay 
regard  to  the  source  of  income,  either  by  differentiation 

1  No  income-tax  is  levied  in  any  of  the  states  of  the  Union, 
with  the  exception  of  North  Carolina,  where  a  tax  of  2  per  cent, 
is  payable  on  all  incomes  exceeding  ,£200  a  year. 

6? 


TAXES  ON   PROPERTY  AND   INCOME    [CHAP. 

of  rates,  or  by  employing  a  fixed  rate  together  with 
supplementary  taxes  on  various  forms  of  capital  and 
modes  of  industry.  In  some  cases  the  graduation  is 
effected  by  the  classification  of  incomes  in  groups,  each 
group  paying  at  a  different  rate ;  also  discrimination 
is  made  between  "  earned  "  incomes  (wages)  and  "  un- 
earned "  incomes  (profits).  The  scale  of  graduation  is 
usually  more  extended  than  in  the  British  system ; 
for  example,  while  in  England  taxation  commences 
only  after  £160,  and  with  a  shilling  rate  takes  I  per 
cent,  on  incomes  of  £200,  and  reaches  5  per  cent,  at 
£700,  the  Prussian  tax  commences  at  £45,  attains  I 
per  cent,  on  incomes  of  £60,  and  reaches  4  per  cent, 
only  at  £5000.  In  Great  Britain  the  heaviest 
burden  of  the  tax  is  borne  by  incomes  between 
£250  and  £700,  but  in  Prussia  30  per  cent,  of  the 
whole  yield  is  obtained  from  incomes  between  .£45 
and  £150. 

The  Continental  systems  of  income-tax  aim  at 
securing  equity  in  the  operation  of  the  tax  regarded 
singly,  by  taking  into  consideration  the  various  con- 
ditions of  its  incidence ;  consequently  their  schemes 
are  much  more  elaborate,  the  machinery  of  collection 
is  more  costly  and  less  efficient  than  that  of  the  British 
system,  and  they  are  less  productive. 

Most  of  the  Australasian  colonies  have  adopted  an 
income-tax,  but  their  methods  of  graduation  are  not 
uniform  ;  the  rates  are  different,  and  the  minimum 
exempt  is  also  variable.  In  all,  however,  differentia- 
tion is  made  on  several  grounds,  and  more  especially 
between  incomes  from  property  and  incomes  from 
personal  exertion.  In  New  South  Wales,  where  there 
is  also  a  land-tax  and  a  death  duty,  the  rate  of 

68 


iv.]  DEATH   DUTIES 

income-tax  is  uniform  at  6d.  in  the  £,  but  incomes 
under  £200  derived  from  labour  are  exempt. 

Canada  has  no  income-tax  for  State  purposes. 

Duties  on  Inheritance  of  Property  are  very  ancient, 
and  are  most  probably  connected  with  the  theory 
that  unowned  wealth  and  property  of  intestate  persons 
belonged  of  right  to  the  State.  They  existed  among 
the  Romans.  Under  Feudalism  customary  dues  were 
paid  on  inheritance,  and  were  graduated  in  degree 
according  to  the  value  of  the  estate. 

The  Death  Duties  were  introduced  into  Great 
Britain  with  the  Stamp  Act  in  1694,  and  were  copied 
from  Holland.  In  time  they  developed  into  a  com- 
plex group  of  taxes  which  displayed  various  inequali- 
ties and  irregularities  ;  these  were  swept  away  by  the 
Finance  Act  of  1894,  and  a  simpler  system  of  Estate 
Duty  was  instituted.  At  the  time  of  the  passing  of 
this  Act  the  duties  were  collected  under  five  distinct 
heads : 

(1)  Probate  Duty. — This  was  first  levied  in   1694,  on 
personal  estate  only,  at  55.  on  all  probates  of  £20  and 
upwards  ;  it  was  afterwards  raised  to  IDS.     The  scheme 
was  often  modified,  and  became  ultimately  a  graduated 
tax  on  all  sums  above  .£100,  reaching  3   per  cent,  at 
£1000. 

(2)  Legacy   Duty,   imposed    in    1796   on  all  kinds  of 
property,  was   introduced  by  Pitt,  who  copied  it  from 
the  Dutch. 

(3)  Succession     Duty     was     imposed     in     1853     by 
Gladstone    on    both   real    property   and     settled   per- 
sonalty ;  it  was  calculated  on  the  life-interest,  and  could 
be  paid  by  instalments. 

(4)  Account  Duty  was   a  special   probate   on    Deeds 

69 


TAXES   ON   PROPERTY   AND   INCOME    [CHAP. 

which   had   escaped   the   older   probate  duty ;    it   was 
adopted  in  1881. 

(5)  Estate  Duty  was  an  additional  tax  of  I  per  cent, 
levied  on  both  personalty  and  succession  when  the 
amount  exceeded  £10,000;  it  was  introduced  in  1887. 

This  scheme  indicates  the  development  of  a  tendency 
to  tax  accumulated  wealth  on  some  progressive  principle. 
The  Finance  Act  of  1894  carried  this  principle  much 
further.  The  whole  system  of  duties  was  revised. 
A  single  Estate  Duty  was  imposed  on  all  property 
whatever,  whether  personal  or  real,  settled  or  not 
settled  ;  graduation  was  adopted  in  a  scheme  of  twelve 
stages,  commencing  at  i  per  cent,  on  sums  between 
£100  and  £500,  and  reaching  8  per  cent,  on  £1,000,000. 
Further,  on  settled  property  when  the  whole  estate 
exceeds  £1000  net  value  an  additional  i  per  cent,  is 
levied  on  every  sum  of  £100,  or  fractional  part  of  £100 
beyond  the  last  complete  £100. 

The  Estate  Duty  is  assessed  on  the  aggregate  estate, 
which  often  consists  of  many  items  and  varieties  of 
property ;  thus  the  total  value  from  all  sources  must 
be  ascertained  at  once  in  order  that  duty  may  be 
paid,  but  in  this  process  many  difficulties  arise,  and 
inequalities  are  unavoidable.  A  portion  of  the  estate 
duty  is  paid  to  the  Local  Taxation  Account,  and  the 
greater  part  of  this  sum  is  apportioned  between  the 
councils  of  administrative  counties  and  county  boroughs 
for  purposes  of  local  expenditure.1 

Legacies  on  Personalty,  Annuities,  and  Successions  on 
Realty  pay  also  a  duty  graduated  according  to  relation- 

1  This  was  originally  80  per  cent,  of  half  the  proceeds  of  the 
Probate  duty,  but  now  a  corresponding  sum  is  paid  out  of  the 
Estate  duty  derived  from  personal  property. 

70 


iv.]  ESTATE   DUTY 

ship :  children  or  parents  pay  I  per  cent,  brothers  and 
sisters  3  per  cent,  other  relatives  5  or  6  per  cent.,  and 
strangers  in  blood  10  per  cent. 

The  incidence  of  the  estate  duty  is  upon  property 
which  passes  at  death  ;  it  is  therefore  a  direct  tax  upon 
the  recipient  of  the  property,  and  cannot  be  transferred, 
It  has,  however,  certain  indirect  effects  upon  the  dis- 
tribution, and  possibly  the  production  of  wealth : 
firstly,  by  the  taxation  of  capital  it  raises  revenue 
which  would  have  to  be  provided  by  other  means  (as 
by  taxes  on  income  or  commodities)  if  the  estate  duty 
were  abolished  ;  secondly,  it  may  tend  to  check  industry 
and  accumulation  at  an  earlier  stage  by  weakening  the 
motives  to  effort  in  a  very  productive  class,  just  as  a 
fall  in  the  rate  of  interest  is  said  to  have  a  tendency 
to  diminish  thrift  and  to  reduce  capital.  Again,  the 
duty  which  is  paid  out  of  a  large  estate  at  death  may 
affect  the  scale  of  the  business  in  which  it  was  invested  by 
withdrawing  capital,  and  thus  it  may  check  production. 
The  duty  also  falls  severely  upon  the  families  in  the 
case  of  small  properties  at  a  time  when  their  expenses 
are  necessarily  great.  This  is  an  argument  in  favour  of 
exempting  small  estates  or  reducing  the  duty  on  the 
smaller  capital  sums  left  at  death. 

The  estate  duty  is,  by  its  nature,  an  irregular  source 
of  income,  yet  it  realises  a  fairly  constant  amount  on 
the  whole,  and  has  come  to  be  counted  upon  with  some 
assurance  as  a  regular  contribution  to  the  annual 
Budget.  The  tax  has  gained  popularity  with  the 
masses  since  it  falls  only  upon  the  propertied  classes, 
and  it  has  the  characteristics  of  a  measure  for  altering 
the  redistribution  of  wealth  by  the  appropriation  of 
accumulated  wealth.  If,  however,  the  scale  be  unduly 


TAXES   ON   PROPERTY   AND   INCOME   [CHAP. 

heavy,  it  may  become  an  instrument  of  confiscation,  and 
by  introducing  insecurity  it  may  seriously  discourage 
accumulation,  encourage  gifts  inter  vivos,  and  create 
evasion  in  various  other  ways. 

As  forming  part  of  a  composite  system  of  taxation, 
the  death  duties,  like  the  income-tax,  tend  towards 
the  attainment  of  equality  of  sacrifice,  since  they  are 
direct  taxes  falling  only  upon  classes  who  benefit  by 
accumulated  wealth,  while  indirect  taxes  touch  wage- 
earners  with  small  incomes  more  acutely. 

Professor  Bastable  maintains  that  a  death  duty  is 
in  effect  an  extra  income-tax  capitalised  in  one  sum  ; 
he  finds  support  for  this  view  in  the  growing  practice  of 
insuring  against  the  reduction  in  value  which  the  tax 
otherwise  causes  to  the  recipient  of  the  estate. 

The  death  duties  afford  the  best  examples  of  pro- 
gressive taxation,  though  the  system  of  graduation 
adopted  is  necessarily  arbitrary ;  it  is  difficult,  however, 
to  apply  the  principle  of  progression  so  as  to  secure  a 
scale  which  shall  be  in  all  respects  equitable,  either  as 
regards  the  incidence  of  the  tax  considered  by  itself  in 
its  effects  on  different  cases,  or  as  regards  the  relation  of 
the  tax  to  the  whole  system  of  taxation  of  which  it 
forms  only  a  part.  The  following  figures  (1904-5)  serve 
to  illustrate  the  relative  yield  of  the  different  death 
duties. 

1.  Estate  Duty  on  Property        .  £13,272,562 

2.  Legacy  and  Succession  Duty  3,869,497 

3.  Probate  and  Account  Duty     .  63,795 

4.  Temporary  Estate  Duty          .  8,365 

5.  Corporation  Duty            .         .  44,2  u 


TOTAL  .        .    £17,258,430 
72 


IV.] 


INHABITED   HOUSE   DUTY 


Of  this  sum  £4,318,958  was  paid  into  the  Local 
Taxation  Accounts  in  relief  of  local  expenditure. 

The  Inhabited  House  Duty  is  an  imperial  tax  levied 
upon  the  occupants  of  houses,  and  realises  nearly 
£2,000,000  a  year.  It  is  the  modern  representative  of 
the  more  ancient  hearth  and  window  taxes.  The  hearth- 
tax  dates  back  to  feudal  times,  but  it  became  a  statutory 
tax  in  1662,  when  Parliament  voted  it  to  Charles  II.  in 
lieu  of  certain  other  taxes  and  feudal  rights.  Abolished 
in  1688,  it  was  replaced  in  1696  by  a  tax  on  windows, 
which  survived  until  1851.  Both  taxes  rested  on  an 
assumption  that  a  test  of  ability  to  pay  was  to  be  found 
in  the  size  of  the  house,  of  which  the  number  of  hearths 
or  windows  formed  an  index.  They  were  found 
objectionable  as  having  a  tendency  to  cut  down  these 
utilities ;  they  placed  a  charge  upon  prime  necessaries 
of  life,  light  and  warmth,  and  the  limitations  they 
induced  were  injurious  to  health. 

The  Inhabited  House  duty  was  first  adopted  in  1778  ; 
it  was  repealed  in  1834,  but  was  again  reimposed  on 
the  occasion  of  the  abolition  of  the  window-tax  in  1851  ; 
it  is  now  exacted  upon  all  houses  and  business  premises 
of  a  letting  value  of  £20  and  upwards.  A  reduced 
scale  is  applied  to  business  premises,  registered  lodging- 
houses  and  farm-houses.  The  tax  is  graduated  on  a 
progressive  scale  : 


Houses,  residential 

Public  Houses,  Farm  Houses,  and 
Business  Premises     . 

73 


£20  rental, 
and  not  ex- 
ceeding £,4,0 

Above  .£40 
rental 

Above  £60 
rental 

3d- 

6d. 

9d. 

ad. 

4d. 

6d. 

TAXES   ON   PROPERTY   AND   INCOME  [CHAP. 

It  has  been  held  by  Mill  and  others  that  house-rent 
is  practically  a  voluntary  statement  of  income,  that  it 
represents  a  fairly  uniform  proportion  of  income,  and 
may  thus  constitute  a  fair  basis  for  taxation.  House- 
rent  does  probably  form  a  most  appropriate  basis  for 
local  taxation,  since  the  expenditure  of  rates  confers 
an  equivalent  in  local  services  which  are  proportionate 
in  some  degree  to  the  character  of  the  house,  but 
house-rent  is  not  necessarily  a  true  criterion  either  of 
income  or  of  ability  to  pay  national  taxation.  Houses 
are  selected  on  other  considerations,  such  as  ideas  of 
health,  size  of  family,  character  of  employment  and 
status.  Certain  positions  in  life  of  a  more  or  less  public 
character,  such  as  that  of  a  medical  man,  demand  a 
good  address  ;  and  of  necessity  a  much  larger  propor- 
tion of  income  is  expended  on  rent  by  the  classes  in 
these  circumstances  than  by  those  whose  position  and 
opportunities  of  employment  are  not  influenced  by 
such  accidental  conditions. 

Again,  the  duty  does  not  discriminate  between  the 
proportion  which  house-rent  bears  to  income  in  different 
localities,  town  and  country,  the  metropolis  and  other 
towns.  A  rich  employer  may  be  able  to  obtain  an 
excellent  and  commodious  villa  many  miles  from  town 
for  a  smaller  rent  than  would  be  paid  by  one  of  his 
clerks  or  employees  who  must  reside  near  his  work, 
and  who  consequently  pays  a  larger  house-tax.  For 
similar  reasons  the  exemption  of  all  houses  with  a 
rental  not  exceeding  £20,  in  town  and  country  alike, 
touches  different  classes  and  incomes  unequally.  Again, 
the  House  duty  cannot  be  assessed  on  country  mansions 
in  any  degree  proportionate  to  the  value  of  the  property 
or  the  income  of  the  owner.  Further,  the  duty  falls  on 

74 


iv.]  HOUSE   DUTY 

a  first  necessary  of  life,  and  with  special  severity  upon 
the  poorer  educated  classes  in  towns,  who  either  feel 
compelled  by  their  position  to  spend  a  relatively  larger 
proportion  of  their  small  income  on  housing,  or  who 
do  so  because  they  realise  the  importance  of  providing 
healthy  homes  for  their  families.  Its  tendency,  therefore, 
is  to  check  the  investment  of  capital  in  a  form  which  is 
most  desirable  in  the  interests  of  the  community,  while 
it  imposes  a  penalty  upon  one  of  the  most  commendable 
forms  of  family  expenditure. 


75 


CHAPTER  V 

INDIRECT   TAXATION — TAXES   ON   COMMODITIES 
AND   ACTS 

IN  most  countries  a  considerable  revenue  is  derived 
from  duties  upon  goods  (consumable  wealth),  imposed 
at  some  stage  or  other  in  their  progress  from  the 
condition  of  raw  material  to  final  consumption. 

In  modern  times  such  taxation  is  levied  in  various 
ways  :  (i)  by  direct  duties  on  ownership  or  use,  such  as 
the  taxes  on  carriages  and  guns ;  (2)  by  duties  on  the 
article  at  its  production,  like  the  excise  on  beer  and 
spirits ;  (3)  by  duties  on  imports  and  exports  at  a 
frontier  (customs)  ;  or  (4)  by  means  of  a  State  monopoly 
of  the  manufacture  and  sale  (tobacco  in  France  and 
Japan,  and  opium  in  India).  To  these  may  be  added 
the  antiquated  tolls  and  market  dues  on  sales  or  on 
transit.  Taxation  on  consumption  was.  in  its  early 
forms  mainly  direct,  and  was  exacted  from  persons 
possessed  of  "  movable  wealth,"  which  was  evidence 
of  their  ability  to  pay ;  it  was  also  imposed  as  a 
charge  upon  enjoyments  and  the  display  of  wealth,1 
or  as  a  sumptuary  measure  for  the  repression  of 
extravagance. 

1  The  tax  on  watches  and  clocks  introduced  by  Pitt  in  1797 
nearly  ruined  the  industry,  and  was  repealed  in  consequence  the 
following  year. 

76 


CHAP,  v.]  INDIRECT   TAXES 

Under  the  complex  system  of  production  which 
is  the  result  of  modern  progress,  taxation  on  con- 
sumption is  effected  mainly  by  duties  on  commodities 
which  are  indirect,  and  can  generally  be  shifted  to 
the  consumer. 

The  few  direct  taxes  on  expenditure  for  enjoyment, 
such  as  duties  on  carriages,  dogs,  guns,  male-servants, 
and  armorial  bearings,  are  now  paid  as  licences. 
Some  of  these,  like  the  carriage  tax,  may  indirectly 
affect  the  industries  concerned  in  the  production  of  the 
taxed  commodity  ;  their  tendency  would  be  to  limit  the 
numbers  in  those  employments  if  the  taxes  were  heavy 
in  amount.  The  direct  taxes  on  enjoyments,  which 
are  mostly  survivals  of  sumptuary  duties,  yield  to 
the  Treasury  relatively  a  small  amount;  such  duties 
belonged  to  an  earlier  and  simpler  period,  when  industries 
were  smaller  and  modern  sources  of  revenue  were  not 
available. 

Tolls  and  market  dues  are  of  remote  origin ;  they 
were  charges  for  the  privilege  of  trading  in  a  certain 
locality,  and  for  the  use  of  roads  and  convenient  places 
for  sales  ;  they  fell  ultimately  on  the  cost  of  commodi- 
ties. Similarly,  licences  for  the  privilege  of  carrying 
on  certain  industries,  or  for  selling  certain  goods 
(beer,  spirits,  tobacco,  etc.),  ultimately  resemble  in  their 
effects  and  general  incidence  a  tax  upon  the  articles 
themselves,  and  they  also  tend  to  restrict  the  number 
of  producers  and  dealers  ;  their  chief  recommendation 
is  that  they  effect  a  kind  of  police  registration  of  the 
persons  engaged  in  these  employments,  which  is 
desirable  in  the  cases  of  occupations  such  as  those  of 
hawkers  and  pawnbrokers. 

There  is  much  force  in  the  view  that  the  most 

77 


INDIRECT  TAXATION  [CHAP. 

appropriate  use  of  licence-duties  in  modern  times  is 
in  the  relief  of  local  taxation,  for  which  purpose 
already  a  large  proportion  is  paid  over  by  the  Govern- 
ment. Subject  to  the  control  of  the  State  over  the 
number  and  class  of  articles  and  the  rates  which 
should  be  adopted,  taxes  of  this  class  might  be  assigned 
altogether  to  local  purposes. 

Monopolies  and  patents  granted  as  privileges  by 
the  Tudor  and  Stuart  sovereigns  formed  an  arbitrary 
and  irregular  kind  of  excise,  yielding  small  revenue 
to  the  Crown,  and  benefiting  mostly  the  monopolist 
at  the  cost  of  the  consumer.  State  monopolies  do  not 
now  contribute  to  British  revenue,  unless  the  Post 
Office  be  so  regarded  ;  but  in  some  European  countries 
the  tobacco,  match,  and  some  other  State  industries 
constitute  a  regular  source  of  revenue. 

The  prevalent  methods  of  taxing  commodities  are 
by  excise  and  customs  duties  ;  these  are  alike  in  their 
general  economic  result,  which  is  to  raise  prices. 

Customs  Duties  are  a  very  ancient  form  of  taxation ; 
traders  entering  a  country  were  charged  a  toll  at  the 
frontier  for  permission  to  enter ;  the  tax  was  a  kind 
of  payment  for  the  privilege  of  trading,  for  safe  passage, 
and  also  for  the  use  of  roads,  etc.  The  assumption 
was  that  the  incidence  was  upon  the  trader,  who,  how- 
ever, recovered  the  tax  in  the  sales  of  his  merchandise. 
In  England  tolls  or  port  duties,  both  on  imports 
and  exports,  became  very  early  a  regular  source  of 
"  customary "  revenue  ;  and  the  duties  were  paid 
originally  in  kind,  e.g.,  one  cask  of  wine  out  of  a 
cargo  of  ten.  They  were  afterwards  converted  into 
regular  money  payments. 

Prisage,  a  duty  on  imported  wine,  was  paid  to  King 

78 


v.]  CUSTOMS   DUTIES 

Richard  I.  ;  John  received  also  import  duties  on  wool, 
salt,  and  fish,  and  export  duties  on  wool  and  leather,  at 
established  rates. 

The  wars  of  Edward  I.  and  Edward  III.  added 
to  the  tolls  on  merchandise  called  "  Ancient  Customs." 
The  permanent  revenue  of  the  Crown  from  these 
sources  was  fixed  by  the  "  Statute  of  the  Staple  "  in 
1353  to  consist  of  (i)  the  Ancient  Customs  on  wool 
and  leather  ;  (2)  the  New  Customs  levied  on  foreign 
merchants ;  (3)  prisage  of  wine  imported  by  native 
merchants,  or  tunnage  paid  by  the  foreign  exporter ; 
and  (4)  poundage  on  goods  imported  or  exported. 
In  1329  the  customs  were  farmed  for  £20  a  day, 
and  yielded  £6260.  In  1411  they  were  estimated  at 
£30,000 ;  at  the  accession  of  James  I.  they  amounted 
to  £127,000;  by  1650  the  yield  was  £500,000,  and  in 
1688  it  had  risen  to  £1,000,000.  In  1671  a  Board 
of  Commissioners  was  first  appointed  to  manage  the 
customs. 

Under  the  influence  of  mercantilism,  import  duties 
were  increased  and  exports  were  encouraged,  with 
the  object  of  securing  a  favourable  "  balance  of 
trade,"  meaning  a  net  import  of  gold  or  silver.  In 
course  of  time  this  system  developed  into  a  policy 
of  employing  import  duties  to  protect  and  foster 
home  production.  This  practice  led  to  retaliation 
and  tariff  wars  between  countries,  and  thus  the  pro- 
tectionist system  was  strengthened  and  came  to  be 
regarded  as  a  patriotic  policy.  Customs  duties  were  no 
longer  regarded  purely  as  a  source  of  revenue,  but  as 
instruments  for  attacking  the  trade  of  foreign  countries. 
This  doctrine  held  sway  in  England  until  1846,  when 
the  Free  Trade  agitation  ended  in  the  abolition  of 

79 


INDIRECT   TAXATION  [CHAP. 

the  Corn  Laws.  Meanwhile,  a  vast  machinery  for  the 
administration  of  the  customs  and  the  repression  of 
smuggling  had  been  called  into  existence,  which  by 
its  expense  greatly  curtailed  the  net  revenue  derived 
from  the  taxes.  The  original  aim  of  a  customs  duty 
was  lost  sight  of  in  the  delusive  patriotism  of  "  striking 
at  foreign  trade,"  and  "  supporting  home  industry,"  and 
retaliating  on  the  foreigner.  Pitt  commenced,  in  1784, 
a  reform  of  the  complicated  system  of  customs  and 
excise  by  simplifying  the  methods  of  collection  and 
reducing  the  taxes,  but  the  outbreak  of  the  war  with 
France  led  to  their  reimposition  and  increase ;  high 
duties  were  placed  on  all  consumable  articles — raw 
materials,  food  stuffs,  and  manufactured  articles  ;  at  the 
end  of  the  war  about  1200  different  articles  were  taxed, 
of  which  the  majority  produced  little  revenue.  In  the 
year  1800  import  duties  yielded  £8, 144,380.  At  the 
peace  of  1815  the  income-tax  was  repealed,  but  the 
duties  on  consumption  were  retained,  and  the  pro- 
tectionist doctrine  was  reaffirmed  by  the  imposition 
of  a  duty  on  foreign  corn,  arranged  on  a  scale  so  as 
to  preclude  its  admission  into  Great  Britain  until  home 
prices  reached  8os.  a  quarter. 

A  petition  from  the  merchants  of  London  in  1820 
for  free  trade  was  the  first  step  in  introducing  a  fresh 
period  of  reform.  Between  1823  and  1826  Huskisson, 
who  was  the  President  of  the  Board  of  Trade,  reduced 
many  duties,  simplified  the  code  of  customs,  and  so 
regulated  the  duty  on  corn  as  to  lower  the  tariff  price 
limit  to  735.  A  financial  crisis  arising  out  of  over- 
speculation,  however,  checked  the  movement  and  sus- 
pended fiscal  reform  for  some  years. 

In  1841  the  task  was  resumed  by  Sir  Robert  Peel; 

80 


v.]  CUSTOMS   REFORM 

the  tariff  then  included  duties  on  1150  articles,  the 
majority  of  which  were  unproductive,  while  some,  by 
their  prohibitive  character,  yielded  little  or  nothing. 
Peel  persistently  aimed  at  simplifying  the  method  of 
taxation,  and  at  reducing  the  cost  of  collection.  He 
abolished  prohibitive  duties,  reduced  considerably  the 
duties  on  raw  materials  and  partly  manufactured  goods, 
and  in  a  less  degree  those  on  manufactures,  and  as 
a  means  of  tiding  over  the  period  of  reform  he  re- 
introduced  the  income-tax. 

Peel's  policy  was  a  definite  advance  towards  free 
trading,  although  he  retained  the  duty  on  corn,  re- 
garding agriculture  as  a  national  industry  of  special 
importance.  His  complete  acceptance  of  free  trade 
followed  quickly  on  the  Irish  famine  of  1845  ;  the 
Corn  Laws  were  repealed  in  1846,  with  the  exception 
of  a  registration  duty  on  corn,  which  survived  till 
1869.  An  Act  for  the  abolition  of  the  Navigation 
Laws  was  also  passed  and  came  into  operation  in 
1849. 

The  reform  of  taxation  was  continued  by  Mr  Glad- 
stone, who  completed  the  establishment  of  the  free 
trade  principle,  and  also  removed  several  vexatious 
forms  of  excise,  including  the  duties  on  building 
materials  (1850),  and  on  soap  (1853).  He  repealed 
the  special  taxes  on  advertisements  in  1850,  the 
duties  on  newspapers  in  1855,  and  on  paper  as  a 
material  in  1861  ;  butter  and  cheese  were  relieved  in 
1860;  the  tea  duty  was  lowered  from  is.  to  6d.  in 
1865,  and  hops  were  freed  in  1862  ;  the  sugar  duty 
was  repealed  in  1874,  and  the  malt  duty  was  converted 
into  a  beer  duty  in  1880. 

Briefly,  the  chief  outcome  of  the  fiscal  legislation  of  the 

81  L 


INDIRECT  TAXATION  [CHAP. 

nineteenth  century  was  to  render  the  British  tariff  purely 
a  financial  and  economic  system.  Customs  duties  are 
now  non-protective,  and  are  collected  on  only  about 
a  dozen  different  kinds  of  articles.  They  are  derived 
mainly  from  luxuries,  are  economically  levied,  and  are 
very  productive.  These  effects  are  seen  in  the  returns 
of  the  revenue  from  customs  in  1904-5.  The  chief  yield 
(£13,204,712)  is  from  tobacco;  wine,  spirits,  and  beer  give 
£5,206,407;  tea  yields  £8,281,663;  sugar,  £6,115,319; 
coffee,  cocoa,  currants,  raisins,  figs,  etc.,  contribute 
£931,813;  exported  coal,  £2,052,773,  and  a  few  other 
items  produce  about  £100,000,  making  a  total  of 
£35,886,105.  As  a  group  of  taxes  levied  on  articles 
of  ordinary  consumption,  mostly  above  the  rank  of 
necessaries,  these  customs  duties  can  be  relied  upon  to 
provide  a  fairly  steady  revenue,  any  falling  off  in  the 
yield  in  one  direction  being  usually  compensated  by 
expansion  in  other  directions.  The  total  volume  is,  of 
course,  subject  to  moderate  fluctuations,  arising  from 
the  causes  which  affect  the  general  prosperity  and 
consuming  power  of  the  nation. 

A  few  items  in  the  list  call  for  special  comment. 
Under  the  pressure  of  war  the  duty  on  tea 
was  raised  in  1900  from  4d.  to  6d. ;  this  was  again 
increased  in  1904  to  8d.  per  lb.,  and  reduced  to  6d.  on 
1st  July  1905  ;  the  duty  on  sugar  (repealed  in  1874) 
was  reimposed  in  1901  on  a  graduated  scale,  varying 
from  24d.  to  5od.  per  cwt,  the  argument  being  that 
these  taxes  would  aid  in  distributing  the  cost  of  the 
war.  Sugar  is  a  necessary  article  of  diet,  and  it  is 
also  an  important  raw  material  in  the  manufacture  of 
jam,  pickles,  beer,  and  blacking.  The  average  annual 
consumption  of  sugar  in  Great  Britain  amounts  to 


v.]  DUTIES    ON   SUGAR   AND  TEA 

nearly  90  Ibs.  per  head,  and  the  tax  involves  therefore 
a  real  sacrifice.  There  is  something  to  be  said  for  a 
duty  on  sugar  in  Great  Britain,  as  for  a  salt-tax  in 
India.  Adam  Smith  regarded  a  tax  on  sugar  as  a 
desirable  tax,  and  one  which  should  be  retained  to 
touch  the  lower  classes,  and  it  certainly  succeeds  in 
reaching  the  classes  who  do  not  pay  income-tax.  Also 
sugar  is  too  bulky  a  commodity  to  induce  smuggling, 
and,  as  it  is  an  article  of  general  consumption,  a  small 
duty1  upon  it  raises  a  considerable  amount. 

During  the  seventies  there  was  much  agitation  for 
"  a  free  breakfast  table,"  that  is,  the  removal  of  duties 
on  tea,  coffee,  and  cocoa,  as  well  as  on  sugar.  If,  how- 
ever, these  indirect  taxes  be  all  abolished,  some  other 
means,  such  as  an  extension  of  the  income-tax,  will  have 
to  be  devised  to  reach  the  classes  who  might  otherwise 
escape  taxation  altogether ;  for  the  sound  maxim  that 
all  should  contribute  in  some  degree  to  the  expenses 
of  government  must  not  be  forgotten.2  The  duties  on 
intoxicants  do  not  touch  abstainers,  and  the  tobacco 
duty  cannot  touch  non-smokers;  and  the  time  seems 
hardly  ripe  for  the  remission  of  all  other  indirect 
taxes,  since  it  would  require  a  much  higher  standard 
of  public  morality  than  that  yet  attained  to  secure  that 
all  contributed  equitably  by  direct  methods. 

1  This  argument  assumes  the  duty  to  be  paid  on  all  sugar  alike  ; 
the  question  of  bounties  and  the  effects  of  the  Brussels  Sugar 
Convention  are  not  here  under  consideration. 

2  Professor  Jevons  insists: — "The  more  carefully  and  maturely 
I  ponder  over  the  problem  of  taxation  from  various  points  of  view, 
the  more  convinced  I  always  return  to  the  principle  that  all  classes 
of  persons  above  the  rank  of  actual  paupers  should  contribute  to 
the  State  in  the   proportion  of    their  incomes." — "  Principles  of 
Economics,"  a  Fragment,  published  1905. 

83 


INDIRECT   TAXATION  [CHAP. 

(2)  The  reimposition  of  a  duty  upon  imported  corn 
in  1902  (repealed,  however,  after  one  year)  was  in  effect 
a  return  to  protection,  and  had  not  the  same  defence 
as  the  sugar  duty.  It  was  supported  by  the  argument 
that  the  tax  would  "  broaden  the  basis  of  taxation " ; 
but  without  doubt  a  tax  on  bread,  which  is  the 
cheapest,  most  common,  and  most  nourishing  food, 
must  fall  with  greatest  severity  upon  the  poor,  and 
it  has  necessarily  the  defect  of  all  duties  upon  imported 
articles  which  can  also  be  produced  at  home.  Such 
taxes  yield  a  revenue  only  on  the  imported  portion 
of  the  supply,  while  they  raise  the  cost  of  the  whole 
supply ;  the  consumer  pays  a  higher  price  for  all, 
while  the  tax  is  derived  only  from  the  imported 
portion.  Taxes  which  produce  this  result  cost  the 
community  much  more  than  they  yield.  Further,  they 
always  tend  to  become  merely  protective  duties,  shield- 
ing the  industries  they  favour  from  foreign  competition, 
and  benefiting  only  the  persons  directly  interested 
in  those  industries,  while  inflicting  a  burden  upon 
the  whole  community.  Moreover,  they  maintain  less 
efficient  modes  of  production  by  removing  the  stimulus 
of  healthy  competition  and  thus  guaranteeing  the  pro- 
ducers of  the  protected  article  a  monopoly  in  their 
own  country ;  they  are,  in  fact,  devices  for  keeping 
up  artificial  prices,  and  are  wholly  ineffective  and 
uneconomic  as  taxes  for  revenue. 

This  is  not  the  place  to  examine  at  length  the 
arguments  for  protection,  but  it  may  be  pointed  out 
that  imports  are  bought  with  exports,  and  that 
they  cannot  be  obtained  without  the  payment  of  an 
equivalent  in  some  form  of  goods  or  service.  It  is 
the  highest  interest  of  a  country  to  employ  its  capital 

84 


v.]  IMPORT  DUTIES 

and  labour  most  efficiently,  z>.,  in  the  industries  for 
which  it  is  best  adapted  by  its  natural  conditions  and 
the  skill  of  its  people ;  with  the  products  of  these 
industries  it  can  purchase  abroad  the  commodities  which 
it  can  produce  less  efficiently.  Free  trade  is  only  an 
application  of  the  simple  and  obvious  principle  that 
the  most  efficient  modes  of  production  yield  the  largest 
wealth.  And  the  richer  the  community  becomes  by 
adopting  the  most  efficient  methods,  the  better  will  it 
be  able  to  contribute  to  taxation  in  other  ways.  No 
duty  which  is  protective  in  its  operation  can  become 
a  productive  revenue-tax ;  the  two  aims  are  incom- 
patible. In  so  far  as  a  tax  protects  it  yields  no 
revenue,  and  in  so  far  as  it  yields  revenue  it  does 
not  protect  the  industry. 

Import  duties,  as  a  rule,  fall  upon  the  countries 
which  impose  them ;  the  only  case  in  which  the  foreign 
producer  could  be  compelled  to  pay  the  whole  duty 
would  be  where  an  importing  country  is  the  sole 
market  for  a  commodity  which  the  exporting  country 
must  continue  to  produce ;  such  a  case  is  rare,  if  it 
exists.  Countries  are  not  generally  so  restricted  in 
their  industries,  and,  moreover,  exporters  have  the 
whole  world  for  their  market ;  and  when  their  foreign 
market  for  a  product  is  made  unprofitable  in  any 
country,  they  seek  other  outlets  for  their  energies  and 
commodities.  Thus  their  trade  is  diverted  to  other 
countries.  Also  if  a  country  attempts  to  exact  toll 
from  a  customer  country,  the  latter  most  frequently 
retaliates  by  other  duties,  and  the  result  is  detrimental 
to  both.  An  expensive  machinery  is  set  up  in  both 
countries  for  endeavouring  to  extract  duties  from 
each  other — a  game  of  mutual  waste  and  futility, 

85 


INDIRECT  TAXATION  [CHAP. 

destructive    of   trade    and    productive    of    mutual   ill- 
will.1 

Import  duties  and  excise  duties  are  alike  taxes  upon 
consumption ;  they  are  at  present  very  convenient 
methods  for  raising  part  of  the  revenue  of  countries, 
but  they  should  be  employed  purely  for  revenue,  and 
the  scheme  of  duties  should  be  carefully  ordered  so 
as  to  be  economic  in  collection,  productive  in  every 
case,  and  well  balanced,  and  they  should  not  be 
imposed  upon  primary  necessaries  of  life. 

The  tariffs  of  most  countries  are  not  designed  purely 
for  revenue,  but  with  a  view  to  the  protection  of  home 
industries ;  yet,  in  the  removal  of  barriers  between 
different  states  and  the  extension  of  the  areas  of 
common  taxation  in  many  countries,  there  are  signs 
that  the  loss  from  protective  taxation  is  being  realised, 
and  that,  ultimately,  these  injurious  systems  may 
disappear.  In  the  United  States  protective  duties 
are  not  permitted  to  be  levied  by  one  state  against 
another ;  every  new  area  admitted  into  the  union  is 
brought  under  the  common  tariff.  Germany  has 
extended  her  Zollverein,  so  as  to  make  the  Customs 
Union  commensurate  with  the  empire.  The  Australian 

1  The  effects  of  retaliation  are  well  illustrated  by  three  recent 
European  tariff  wars  : 

(1)  Between  France  and  Italy  for  the  years  1888-98  :  during  the 
first  eight  years  French  commerce  with  Italy  fell  from  499  to  240 
millions  of  francs. 

(2)  Between  Germany  and  Russia  from  1892-95  ;  in  this  interval 
German  trade  with  Russia  fell  from  723  to  487  millions  of  marks. 

(3)  Between  France  and  Switzerland  from  1892-95  ;  the  trade  of 
France  with  Switzerland  was  reduced  from  337  to  180  millions  of 
francs. 

In  all  these  cases  commerce  began  to  revive  immediately  that 
retaliation  was  abandoned. 

86 


v.]  EXPORT    DUTIES 

Commonwealth  has  replaced  the  customs  of  the  several 
colonies  by  one  general  tariff.  Other  states,  France 
and  Italy,  have  removed  restrictive  duties  within  their 
areas.  Even  the  movement  for  a  British  Imperial 
Customs  Union  has  the  one  merit  of  seeking  to 
remove  the  impediments  to  trade  which  exist  between 
Great  Britain  and  her  Colonies,  although  by  the 
methods  proposed  it  would  inflict  a  greater  loss  by 
setting  up  restraints  on  commerce  with  other  countries. 
These  movements  seem  to  point  to  a  period,  however 
remote,  when  the  world  will  become  one  economic 
area  for  trade,  when  nations  will  only  impose  taxes 
on  imports  for  economic  purposes,  and  will  avoid  the 
waste  and  expense  which  ensue  from  the  prevalent 
tariff  system. 

Export  Duties  formed  part  of  the  "  Ancient  Customs," 
and  were  a  feature  of  the  old  system  of  taxing  the 
operations  of  trading  for  purposes  of  revenue.  Export 
duties  appeared  definitely  in  England  under  Edward  I.  ; 
for  several  centuries  duties  were  levied  on  exports  of 
wool,  hides,  and  leather,  and  later  upon  manufactures 
of  wool  and  linen,  and  also  on  corn  and  coals  as 
"  Customs  Outwards."  The  tax  on  exported  wool  was 
levied  with  the  further  object  of  keeping  the  raw 
material  at  home  to  encourage  the  woollen  industries. 
The  mercantile  theory  which  favoured  exporting  with 
the  idea  of  obtaining  a  balance  in  money,  and  even 
gave  bounties  on  exports  with  that  aim,  did  not  succeed 
in  suppressing  these  duties,  and  it  was  not  until  Peel's 
reforms  of  1842  that  export  duties  were  removed. 
The  duty  on  coal  was  retained  until  1845.  Export 
duties  do  not  appear  again  in  the  British  tax  system 
until  1901,  when  the  coal  duty  was  reimposed  at  is. 

87 


INDIRECT    TAXATION  [CHAP. 

per  ton  to  aid  in  raising  funds  for  the  South  African 
War.  This  duty,  still  continued,  realised  in  1904-5  the 
sum  of  ^"2,052,774.  It  is  a  matter  of  much  difficulty 
to  determine  with  accuracy  the  ultimate  incidence  of 
this  particular  export  duty ;  the  burden  has  been 
variously  assigned  to  coal-owners,  miners,  shippers, 
and  foreign  purchasers. 

In  the  case   of  an  export  duty  on  a  commodity  of 
which  there  are  other  sources  of  supply  or  for  which 
substitutes  can  be  obtained,  the  rise  in  price  consequent 
on  the  export  duty  would  induce  foreign  customers  to 
seek  for  supplies  from   other   competitors  ;   this  would 
reduce  the  export  of  the  country  imposing*  the  duty, 
and   the  trade  would   either   suffer  a   loss   in   reduced 
business,  or  be  compelled  to  pay  part  or  all  of  the  duty 
by  lowering  the  price  to  the  foreign  client.     In  either 
case  various  classes,  directly  or  indirectly  interested  in 
the  industry,  would  be  affected  adversely  ;  meanwhile  a 
fall  in  home  prices  might  stimulate  the  home  demand 
in  a  slight  degree.     If  the  tax  imposed   be  so   small 
that   the   rise  in   price  does  not  influence  the  foreign 
demand,  the  foreigner  may  pay  the  tax.     But  it  must 
be  remembered  that  the  foreign  supply-market  of  any 
country  for  an  article  which  is  not  a  monopoly  is  wide, 
and,  in   fact,  may  comprise   the   whole   world   outside 
that  country  ;   competition  over  so    large   an  area  will 
stimulate  production  in  other  countries,  and  render  it 
difficult  for  any  one  country  permanently  to  extract  an 
export  duty  on  an  article  of  common  production  from 
all  its  customer-countries.     If  such  a  plan  were  possible 
no  single  country  would  be  allowed  to  monopolise  the 
privilege,  but  the  practice  would  be  adopted  generally ; 
this,  however,  is  absurd.     No  country  can  compel  other 

88 


v.]  EXPORT  DUTIES 

countries  to  pay  its  taxes  by  selling  to  them  its 
ordinary  products  at  an  artificial  price. 

The  only  case  in  which  a  country  can  recover  an 
export  duty  from  a  foreign  purchaser  is  that  of  the 
monopoly-supply  of  a  necessary,  or  of  an  article  much 
in  demand,  for  which  there  is  no  substitute.  In  such 
a  case,  if  all  the  producers  in  the  taxing  country 
combine  to  put  up  the  price  so  as  to  cover  the  tax, 
the  duty  may  be  obtained  from  the  foreign  buyer  ;  if, 
however,  there  be  competition  for  the  foreign  trade  in 
the  taxed  article  amongst  the  sellers  in  the  taxing 
country,  or  if  the  foreigner  can  reduce  his  demand, 
part  or  all  of  the  tax  will  be  paid  by  the  exporting 
country. 

As  regards  British  steam-coal,  it  is  impossible  to 
say  with  any  certainty  on  whom  the  tax  falls  ;  the 
circumstances  which  govern  its  demand  abroad  are 
exceptional :  it  is  said  to  possess  monopoly  value 
by  its  peculiar  quality,  and  as  the  demand  is  great 
for  naval  purposes  the  foreign  importer  possibly  pays 
part  of  the  tax.  India,  however,  affords  a  good 
example  of  revenue  derived  from  an  export  duty ; 
she  produces  a  superior  opium *  at  a  monopoly  price 
regulated  by  government  ;  this  is  an  article  for  which 
she  has  peculiar  advantages  of  production,  and  for 
which  there  is  a  large  foreign  demand  ;  China  is  the 
chief  customer,  and  she  accordingly  pays  the  duty. 
During  the  fifteenth  century,  at  the  period  when 
British  wool  had  a  monopoly  value  and  was  greatly 
in  demand  in  Flanders,  the  export  duty  on  British 
wool  was  doubtless  paid  by  the  Flemish  importers, 

1  The  revenue  of  the  part  which  comes  from  the  native  states  is 
regulated  as  a  transit  duty. 

89  M 


INDIRECT  TAXATION  [CHAP. 

but  they  recovered  it  in  the  price  of  their  exported 
cloth,  which  had  then  a  great  reputation.  Camphor 
from  Formosa,  and  cinnamon  from  Ceylon,  are 
examples  of  monopolies,  which  may  yield  a  revenue 
by  means  of  an  export  duty.  Brazil  imposes  an 
export  duty  on  coffee,  Chili  on  nitrates  ;  owing  to 
the  circumstances  of  production  of  these  articles  the 
duties  are  probably  paid  by  importers.  In  the  case 
of  ordinary  materials  and  manufactures  an  export 
duty  raising  prices  would  soon  destroy  the  export 
trade  by  transferring  it  to  rival  countries  ;  this  method 
of  raising  revenue  is  therefore  available  in  but  few 
cases,  and  these  are  cases  of  monopoly. 

Excise  Duties  are  a  system  of  inland  duties  imposed 
upon  articles  of  consumption.  They  are  indirect  taxes 
upon  home  products,  introduced  into  the  English  fiscal 
system  under  the  Long  Parliament,  and  copied  from 
Holland.  The  term  excise  literally  implies  a  portion 
cut  off  from  a  commodity,  and  suggests  that  the 
State  in  effect  takes  this  portion  for  its  share.  In  its 
modern  use,  the  term  excise  is  applied  to  all  taxes 
on  commodities  produced  in  a  country,  in  contrast 
with  the  customs  duties  which  are  levied  on  goods  at 
the  frontier.  The  excise  was  adopted  in  1643  to 
raise  funds  for  the  Civil  War ;  it  was  imposed  first 
on  beer,  cider,  and  perry,  and  later  on  other  con- 
sumables, food  and  clothing.  The  tax  was  retained 
at  the  Restoration,  and  was  extended  to  many  kinds 
of  goods.  In  his  celebrated  "excise  scheme"  of  1733, 
Sir  Robert  Walpole  included  much  more  than  excise 
duties.  He  sought  to  reorganise  both  the  excise  and 
customs  duties  and  to  effect  economies  by  simplifica- 
tion and  co-ordination,  to  put  a  check  on  fraud  and 

90 


v.]  EXCISE   DUTIES 

smuggling,  and  by  providing  bonding-houses  for  ware- 
housing imports  to  remove  obstacles  and  encourage 
trade ;  the  scheme  was  economic  in  aim,  and  tended 
in  the  direction  of  free  ports  and  free  trading.  His 
projected  reforms  were  defeated,  however,  by  political 
opposition  and  misrepresentation,  and  further  attempts 
at  financial  reform  were  delayed  until  Pitt's  fiscal 
measures  were  introduced.  The  excise  proper,  which 
at  one  time  was  imposed  on  many  classes  of  materials 
and  goods,  is  now  levied  almost  exclusively  upon 
intoxicants,  and  a  customs  duty  upon  any  imported 
article  which  can  be  produced  at  home  is  met  by  an 
equivalent  excise  on  the  home  product.  The  yield 
from  inland  revenue  on  spirits  and  beer  in  1904-5 
was  £31.237,390. 

With  the  Excise  or  Inland  Revenue  are  also  included 
the  Railway  Duty  (£314,894)  and  the  revenue  from 
Licences  (i.)  for  dogs,  carriages,  guns,  game,  male 
servants,  armorial  bearings,  and  (ii.)  for  permission 
to  follow  certain  occupations : — those  of  publicans, 
brewers  and  distillers,  tobacco  dealers,  auctioneers,  pawn- 
brokers, dealers  in  gold  and  silver  plate,  hawkers, 
pedlars,  etc.  The  total  amount  yielded  by  licences  in 
1904-5  was  £4,327,564.  Of  this  sum  only  £253,187 
went  to  the  account  of  imperial  revenue,  .the  larger 
proportion,  £4,074,377,  being  paid  to  local  authorities 
in  aid  of  local  taxation. 

The  general  result  of  an  excise,  as  of  a  customs  duty, 
is  to  impose  an  indirect  tax  on  the  consumer  to  the 
amount  of  the  duty.  But  there  are  secondary  effects, 
and  many  taxes  have  been  repealed  not  so  much  on 
account  of  the  pressure  of  the  duties  as  on  account  of 
their  indirect  effects  upon  industry.  If  the  charge  be 


INDIRECT   TAXATION  [CHAP. 

made  upon  a  process,  or  at  an  early  stage  in  the 
manufacture,  or  upon  a  material  or  agent,  it  involves 
additional  expense  to  the  producer,  which  will  become 
an  element  of  cost  to  be  recovered  in  the  sale ;  hence  it 
is  an  economic  maxim  that  duties  on  commodities  should 
be  levied  only  on  the  finished  article  and  never  on 
the  raw  material.  Taxation  should  touch  production  as 
lightly  as  possible,  and  should  neither  stifle  the  industry 
nor  tend  to  make  it  a  monopoly.  When  a  choice  has 
to  be  made  between  two  taxes  we  should  avoid  taxing 
an  article  which  stimulates  industry. 

The  aim  of  taxation  is  revenue  ;  by  confining  indirect 
taxes  to  few  articles  the  cost  of  collection  is  diminished  ; 
the  selected  articles  should  be,  however,  sufficient  in 
number,  and  of  such  a  kind  as  to  touch  all  classes, 
and  to  reach  in  a  moderate  degree  those  who  do  not 
contribute  to  direct  taxation.  The  articles  suitable  for 
taxation  vary  with  the  circumstances  of  a  country  and 
the  habits  of  the  people ;  tea  and  coffee,  beer,  spirits, 
and  tobacco1  are  very  suitable  commodities  in  Great 
Britain,  while  a  salt-tax  is  almost  the  only  form  of 
taxation  which  can  touch  the  masses  in  India.  The 
rule  that  necessaries  should  be  free  and  that  indirect 
taxes  should  fall  only  on  luxuries  is  thus  a  counsel 
of  perfection  not  always  attainable ;  in  a  country 
where  three-fourths  of  the  population  consume  no 
luxuries,  the  majority  can  only  be  taxed  through 
necessaries,  and  in  these  circumstances  there  is  no 
hardship  in  such  a  tax. 

There  is  always  a  limit  to  the  productivity  of  any 

Immoderate  smokers  and  drinkers  undoubtedly  pay  a  large 
percentage  of  their  income  in  taxation,  but  this  is  not  the  case 
with  those  who  are  moderate  in  such  expenditure. 

92 


v.]  AD    VALOREM  TAXATION 

particular  tax ;  by  this  is  meant  that  a  heavy  tax 
may  reduce  the  revenue-yield  by  discouraging  con- 
sumption. The  point  of  profitable  taxation  is  a 
matter  of  importance  to  be  ascertained  by  govern- 
ment ;  financiers  by  experience  become  able  to  fore- 
cast the  probable  effect  of  a  small  addition  to  the 
duty  upon  an  article ;  this  is  not  by  any  means  a 
constant  proportion,  since  the  elasticity  of  demand 
is  variable,  and  much  depends  upon  the  state  of 
prosperity  and  the  habits  of  a  people,  while  the  con- 
ditions of  trade  are  also  subject  to  many  causes  of 
fluctuation. 

The  method  of  ad  valorem  duties  or  taxing  com- 
modities in  proportion  to  value  is  desirable  ;  but  it  is  not 
easy  to  carry  out,  and  it  is  not  adopted  to  any  extent 
in  Great  Britain.  The  tax  on  tea,  for  example,  is  at 
the  same  rate  on  all  qualities  alike,  while  an  ad  valorem 
tax  would  be  rated  according  to  the  quality  of  the  tea, 
as  expressed  in  price  per  Ib.  It  is  objected  that  since 
a  uniform  tax  per  Ib.  is  heavier  on  the  cheaper  qualities, 
therefore  its  incidence  is  greatest  on  the  poorer  classes 
of  consumers,  and  that  the  tea  duty  inflicts  an  injustice ; 
but  the  practical  difficulties  of  ad  valorem  taxation  are 
so  great  that  it  could  not  be  applied  to  tea  with  any 
approach  to  justice  or  economy ;  the  attempt  would 
involve  great  expense,  would  lead  to  evasion,  and  would 
favour  the  consumption  of  the  inferior  kinds  of  tea.  It 
must  be  recognised  that  no  single  tax  can  secure  equity, 
and  that  in  the  British  system  compensation  for  this 
defect  is  found  in  the  aggregate  of  the  taxes  ;  those 
who  pay  relatively  most  on  tea  escape  direct  forms  of 
taxation  altogether.  In  some  cases  an  approximation  to 
taxation  in  proportion  to  value  is  possible — e.g.,  spirits 

93 


INDIRECT  TAXATION  [CHAP. 

and  beer  are  graded  according  to  their  strength,  which 
can  be  easily  tested ;  similarly  sugar  pays  according  to 
the  proportion  of  saccharine  matter. 

Taxes  on  the  transfer  of  wealth  are  taxes  on 
actions  or  processes ;  they  are  an  interference  with 
the  freedom  of  business  and  exchange,  and  so  far 
tend  to  check  activity  and  impede  progress.  They 
may  in  some  instances  be  regarded  as  fees  for 
services  rendered,  but  in  most  cases  they  are  a  tax 
on  the  movements  of  capital,  and  fall  on  a  limited 
class  which  is  very  active  and  very  productive.  They 
are  defended  as  "  not  felt,"  as  falling  mainly  upon 
speculative  profits,  and  as  not  being  sufficiently  heavy 
to  interfere  materially  with  trade.  They  are  con- 
venient in  collection,  and  the  yield  is  such  as  not  to 
attract  great  attention,  while  their  incidence  is  upon 
the  accumulated  wealth  of  the  comfortable  classes  ; 
thus,  though  they  cannot  be  treated  as  a  large  or 
important  factor  in  taxation,  they  may,  if  not 
excessive,  contribute  something  in  a  composite  system 
towards  equitable  distribution  of  taxation  by  imposing 
an  additional  charge  on  wealth.  In  so  far  as  they 
restrict  transfer  they  interfere  with  efficient  action 
and  may  influence  the  direction  of  investments  of 
capital ;  the  incidence  according  to  circumstances  at 
the  time  may  be  upon  either  the  buyer  or  the  seller, 
or  it  may  be  shared. 

Stamp  Duties  are  not  a  special  class  of  tax,  but  a 
mode  of  collecting  various  kinds  of  revenue  by  a  process 
of  registration.  They  are  duties  upon  documents  or  in- 
struments essential  to  render  certain  proceedings  legal. 
This  kind  of  taxation  is  sometimes  self-collecting, 
sometimes  effected  at  a  public  office,  and  it  is 

94 


v.]  STAMP   DUTIES 

enforced  by  requiring  the  stamp  record  for  legality ; 
such  taxes  are  easily  graded  on  an  ad  valorem  basis. 
Stamp  duties  are  imposed  on  different  kinds  of  acts 
— the  sale  of  property,  succession  to  estates,  deeds 
of  gift,  leases,  settlements,  life  insurances,  contracts 
of  many  kinds,  agreements,  sale  of  stock  and  shares, 
etc.  Stamp  duties  are  also  paid  for  licences  granting 
permission  to  follow  various  occupations  —  those  of 
solicitors,  bankers,  conveyancers,  etc.  This  initial 
outlay  tends  to  limit  the  numbers  entering  those 
professions ;  it  is  an  element  of  expense,  and  becomes 
a  factor  in  the  charges  for  the  services  of  those 
classes,  and  thus  ultimately  falls  on  their  clients. 

Stamp  duties  were  copied  from  Holland  in  1694. 
They  were  much  extended  during  the  following  century, 
and  especially  at  the  time  of  the  war  with  France ; 
modified  and  consolidated  after  1815,  they  were  revised 
and  improved  in  method  in  1853,  when  Mr  Gladstone 
adopted  the  penny  receipt  stamp.  The  system  was 
again  simplified  and  reduced  to  a  code  by  the  Stamp 
Act  of  1870.  The  various  stamp  duties  now  yield 
almost  £8,000,000  per  annum,  and  affect  a  consider- 
able list  of  transactions.  They  are  grouped  under 
four  heads  as  relating  to  (i)  Bills  of  Exchange  and 
Promissory  Notes  ;  (2)  taxes  on  receipts,  cheques,  etc. ; 
(3)  transactions  relating  to  property — sales,  settlements 
of  money,  leases,  and  securities  for  money  ;  (4)  other 
deeds  and  instruments,  etc. 

Some  stamps  are  merely  a  convenient  method  of 
taxing  a  commodity ;  such  are  the  duties  on  patent 
medicines  and  playing  cards,  which  fall  ultimately 
upon  the  consumer,  and  in  so  far  as  they  tend  to 
check  the  demand  they  limit  the  capital  employed 

95 


TAXES  ON   COMMODITIES  AND  ACTS    [CHAP. 

in  the  industry.  The  incidence  of  taxes  on  receipts 
is  most  probably  on  the  receiver,  who  can  at  the 
moment  of  payment  easily  afford  the  tax,  while  it  is 
too  small  to  be  perceptible. 

Taxes  on  the  sale  of  immovable  property  (land  and 
houses)  have  been  criticised  as  imposing  restraints  upon 
the  free  exchange  of  this  class  of  wealth,  and  as  hinder- 
ing its  development  by  preventing  it  from  passing  readily 
into  the  hands  of  those  who  are  best  able  to  render  it 
productive ;  they  were  regarded  by  Mill  as  a  fine  upon 
the  seller  who  usually  parts  with  his  property  under 
some  necessity  and  therefore  incurs  the  loss  of  the 
tax.  The  incidence  of  a  tax  on  transfer  is  doubtless 
determined  by  the  relative  urgency  of  the  seller  or  the 
buyer  at  the  time ;  the  price  is  fixed  according  to  the 
law  of  reciprocal  demand,  and  is  much  affected  by  the 
degree  of  publicity  and  consequent  extent  of  the  market. 
As  a  tax  paid  by  the  buyer  is  an  addition  to  the  price, 
it  reduces  the  amount  of  his  offer,  and  thus  in  ordinary 
cases  the  tax  is  probably  shared  between  the  buyer  and 
seller ;  in  any  case  it  is  a  tax  upon  accumulated  wealth 
which  acts  as  a  check  upon  the  facility  of  purchase, 
and  by  its  friction  tends  to  reduce  the  amount  of 
business.  Land  is  the  raw  material  of  agriculture, 
and  an  essential  factor  in  all  industries  ;  taxation  on 
its  employment  is,  therefore,  like  the  taxation  of  all 
raw  materials,  undesirable.  Fees  for  registration  and 
for  legal  charges  incurred  in  the  sale  are  necessary, 
and  registration  is  desirable,  both  in  the  interests  of 
the  dealers  and  of  the  community.  Charges  for  this 
service  are  not  strictly  taxes,  but  the  stamp  duties 
on  transfer  are  far  in  excess  of  payment  for  public 

service. 

96 


v.] 


STAMP  AND    RAILWAY    DUTIES 


STAMP  DUTIES,  1904-5. 

Deeds  and  other  Instruments      .      £3,604,676 

Deeds — Penalties         .         .        .  6,022 
Bonds  to  Bearer  and  substituted 

Securities      ....  211,939 

Companies'  Capital  Duty     .         .  388,608 

Contract  Notes  (above  id.)  .         .  193,017 

Loan  Capital  Duty       .         .         .  73>I4° 

Foreign  Certificates      .         .         .  36,195 

Share  Warrants    ....  61,236 

Bills  of  Exchange         .         .        .  700,457 
Compositions  for  Duties  on  Bills, 
and  Notes  of  Banks  of  Eng- 
land    and     Ireland    and    of 

Country  Banks      .         .         .  120,769 

Cards    .                 ...  24,163 

Licences  and  Certificates      .        .  173,465 

Life  Insurances     ....  76,380 

Marine  Insurances        .         .         .  225,001 

Medicines  (Patent)       .         .         .  331,439 
Receipts,  Drafts,   and   other    id. 

Stamps          ....  1,577,006 


£7,803,513 

The  Railway  Duty  is  a  tax  upon  communication  and 
transport.  In  Great  Britain  the  duty  is  2  per  cent,  on 
fares  above  id.  per  mile  on  the  urban  passenger  traffic, 
and  5  per  cent,  on  country  traffic  ;  fares  of  id.  per  mile 
or  less  are  free  from  taxation.  The  tax  yielded  £354,891 
in  1904-5.  The  railway  duty  is  a  special  tax  upon  one 
form  of  private  capital,  since  railway  companies,  like 

97  N 


TAXES   ON   COMMODITIES  AND  ACTS    [CHAP. 

other  industries,  pay  both  income-tax  and  local  rates. 
The  tax  is  a  survival,  and  is  inherited  from  the  old 
5  per  cent,  duty  on  stage  coaches ;  it  is  supposed  to 
be  justified  as  falling  upon  the  holders  of  a  transit- 
monopoly.  This  defence  of  the  tax,  however,  involves 
a  contradiction,  since  the  lower  fares  are  specially 
exempted  from  taxation,  in  order  to  confer  a  boon 
upon  the  poorer  passengers,  and  this  exemption  must 
rest  on  the  assumption  that  the  passengers  would  other- 
wise pay  the  tax.  The  incidence  is  difficult  to  trace, 
and  is  not  uniform,  but  it  probably  falls  upon  the 
ordinary  shareholders  in  most  cases. 

When  the  railway  is  in  competition  with  other  rail- 
ways, or  with  other  modes  of  transit  (sea,  canal, 
tramway,  etc.),  to  that  extent  the  monopoly  is  limited  ; 
the  company  endeavours  to  secure  its  share  of  the 
traffic,  and  cannot  therefore  place  any  special  duty 
upon  the  passenger  without  the  risk  of  inducing  him 
to  adopt  the  alternative  mode  of  transit.  But  when  the 
railway  has  practically  no  competitor,  and  its  traffic  is 
more  or  less  assured,  it  can  adopt  a  higher  scale  of 
charges,  and  it  may  shift  the  duty  to  the  passenger 
as  an  extra  charge,  so  long  as  it  does  not  drive  him 
away  by  raising  the  price  above  the  marginal  utility 
of  the  service.  Duties  on  transit  are  common  on  the 
Continent.  In  France  a  railway  duty  of  5  per  cent,  is 
exacted  on  goods,  and  23  per  cent,  on  passengers,  by 
which  means  £3,250,000  are  raised  ;  but  French  railways 
are  largely  financed  by  the  State,  which  guarantees  the 
interest  on  the  shareholder's  capital. 

Taxes  on  transport  are  uneconomic ;  they  tend,  like 
duties  on  commodities,  to  raise  prices,  to  check  business, 
and  reduce  consumption  ;  and  they  create  economic 

98 


v.]       THE   RAILWAY   DUTY   AND   POST   OFFICE 

friction,  which  is  always  an  obstacle  to  trade.  The 
British  railway  passenger  duty  is  a  relic  of  an  anti- 
quated system ;  it  raises  little  revenue,  and  is  not  based 
upon  any  scientific  principle.  Government  regulation 
of  railways  is  necessary,  and  can  be  affected  by  other 
means ;  but  duties  on  transit  cannot  be  regarded  as 
economically  desirable  in  an  industrial  and  commercial 
country  ;  they  hinder  the  natural  distribution  of  wealth, 
and,  like  any  other  cause  of  expense,  they  tend  to  divert 
trade  into  competing  cheaper  routes ;  they  are  particu- 
larly undesirable  in  a  country  which  desires  to  cultivate 
an  entrepot  trade,  or  which  is  engaged  in  the  business 
of  a  carrier  by  shipping.  In  such  a  country  any 
obstruction  to  free  movement  or  anything  which,  like 
heavy  dock  charges,  increases  cost  is  injurious,  and  may 
be  fatal  to  the  shipping  enterprise  by  diverting  its  trade 
to  rivals. 

The  Post  Office  affords  a  peculiar  source  of  revenue. 
For  the  year  1905  its  earnings  (excluding  telegraphs) 
were  £16,100,000,  and  its  expenses  £10,198,000. 

A  high  rate  for  postage,  telegrams,  and  telephone- 
messages  is  of  the  nature  of  a  transit  duty,  and  is  both 
impolitic  and  uneconomic,  since  it  tends  to  restrain 
communication  and  to  reduce  business.  The  British 
Post  Office  charges  are,  however,  very  small,  and  the 
net  result  is  a  surplus  revenue  of  more  than  £5,000,000. 
This  mode  of  obtaining  revenue  has  been  objected  to  as 
a  tax  upon  correspondence  ;  it  is  defended  as  a  simple 
means  of  raising  a  considerable  amount  by  a  method 
which  has  no  appreciable  effect  on  business,  and  which 
practically  does  not  touch  the  poorer  classes  at  all. 

It  is  questionable  whether  the  Post  Office  net  revenue 
can  properly  be  regarded  as  a  tax,  it  is  rather  a  case  of 

99 


TAXES   ON   COMMODITIES  AND  ACTS    [CHAP. 

trade-profit.  The  postal  service  is  a  monopoly  con- 
ducted by  the  State;  it  satisfies,  perhaps,  better  than 
any  other  public  undertaking  the  conditions  requisite 
for  a  State  business  enterprise,  viz. :  simplicity,  routine 
method,  the  absence  of  risk,  and  the  greater  efficiency 
of  a  single  organisation.  The  capital  is  large,  and 
consists  mainly  of  public  buildings  and  vehicles,  and,  in 
the  case  of  telegraphs  and  telephones,  of  wires,  poles,  and 
mechanism.  The  functions  of  the  Post  Office  include 
not  only  transmission  of  letters,  papers,  parcels,  and 
telegrams,  but  various  other  tasks  for  which  it  forms 
a  convenient  instrument,  such  as  the  collection  of  taxes 
on  guns  and  dogs,  the  sale  of  stamps  for  receipts,  a 
state-banking  system  for  small  deposits,  and  the  trans- 
mission of  small  debts  and  credits,  the  sale  of  govern- 
ment stock,  etc.  Some  of  these  services  are  not  very 
productive,  and  Post  Office  banking  involves  a  positive 
loss  since  the  rate  of  interest  paid  by  the  State  is  more 
than  it  receives,  when  expenses  of  staff  are  taken 
into  account.  It  seems  impossible  to  assign  the  Post 
Office  net  surplus  definitely  to  any  one  of  its  many 
functions,  though  far  the  largest  portion  must  be 
derived  from  profits  on  its  primary  business  of  letter- 
carrying,  and  that  mainly  in  urban  districts  since  the 
expenses  are  relatively  much  less  in  towns  than  in  rural 
districts.  In  any  case  a  substantial  net  income  is 
derived  from  the  whole  group  of  business  transactions ; 
the  charge  for  letter  transit  is  exceedingly  small,  while 
the  gain  to  the  nation  is  considerable,  and  the  advan- 
tage of  a  reduction  in  postage  would  be  trivial  to 
the  masses ;  the  burden,  if  any,  is  widely  diffused  ;  it 
is  fairly  equitable,  and  it  cannot  be  said  to  restrict 
communication  in  any  degree ;  finally,  the  surrender  of 

100 


v.]  THE   CROWN   LANDS 

the  surplus  would  entail   the   necessity  of  some  other 
method  of  raising  revenue  to  that  amount. 

It  should  be  noted  that  the  Telegraph  service,  which 
involved  a  large  capital  outlay,  has  never  been  a  source 
of  revenue  ;  and  in  the  year  1904-5  the  expenditure 
exceeded  the  income  by  £830,000.  On  the  whole, 
Post  Office  revenue  is  a  reasonable  source  of  public 
income,  while  the  charges  are  so  small  as  not  to  limit 
the  utility  of  its  service. 

It  remains  merely  to  mention  several  other  small 
items  of  national  income  which  are  not  derived  from 
taxation.  Crown  Lands  contribute  £470,000;  these 
are  regarded  as  State  property  devoted  to  a  special 
purpose.  In  early  times  the  major  part  of  the  royal 
revenue  was  derived  from  landed  property ;  as  has 
been  shown,  this  source  of  income  was  reduced  by  the 
extravagant  generosity  and  injudicious  expenditure  of 
some  of  the  sovereigns ;  but  other  sources  of  income 
were  found,  and  grew  more  productive.  From  the 
accession  of  William  III.  it  became  the  practice 
to  charge  the  expenses  of  Royalty  upon  a  more 
permanent  fund  called  the  "  Civil  List,"  for  which  an 
amount  is  voted  at  the  accession  of  the  sovereign.  At 
the  accession  of  George  III.  (1760)  the  amount  of  the 
royal  income  was  increased  owing  to  the  surrender  by 
the  King  of  the  Crown  revenues  from  land ;  these 
lands  have  since  been  managed  by  a  department  of 
State  for  woods,  forests,  and  land  revenue. 

Another  interesting  item  of  national  revenue  is  the 
income  derived  from  an  investment  of  £5,000,000  made 
by  Lord  Beaconsfield  in  Suez  Canal  Shares,  which  are 
now  valued  at  £30,857,000,  and  for  the  year  1904-5 
yielded  a  dividend  of  £990,698.  Sundry  loans  made 

101 


TAXES  ON   COMMODITIES  AND  ACTS  [CHAP.  v. 

by  the  British  Government  to  Sardinia,  Greece,  and  to 
a  few  dependencies,  also  paid  .£1,014,303  during  the 
year  1904-5  as  interest  and  repayment  of  capital. 

Under  the  head  of  Miscellaneous  Revenue  for  the  year 
1904-5  are  receipts  amounting  to  £1,426,100.  Of  this 
sum  the  largest  item  was  £983,000  for  fees  paid  into 
the  Courts  of  Justice,  and  for  registration  of  patents 
and  stamps.  Profits  on  the  Mint  amounted  to  £43,785  ; 
the  Bank  of  England  contributed  £186,065  mainly  from 
profits  on  the  issue  of  uncovered  notes.  Receipts  from 
various  departments  and  sources,  including  £1032  for 
conscience  money  and  £10,000  from  the  Isle  of  Man, 
make  up  the  remainder. 


102 


CHAPTER   VI 

INCIDENCE  OF  TAXATION 

THE  problem  of  the  incidence  of  taxation  is  one  of  its 
distribution ;  it  is  an  attempt  to  unfold  and  explain 
the  various  effects  of  a  tax. 

Real  incidence  points  to  the  ultimate  burden  of  the 
tax  in  contrast  with  its  first  or  immediate  incidence. 
The  effects  of  a  tax  are  often  very  complex  ;  shifting  or 
repercussion  moves  the  burden  on,  sometimes  quickly, 
to  a  second  person ;  in  other  cases  it  is  distributed 
slowly  and  may  affect  various  interests.  Shifting  in  a 
greater  or  less  degree  is  general  in  the  case  of  taxes  on 
commodities  and  operations. 

Taxes  are  shifted  in  various  ways,  and  to  pursue  the 
incidence  is  often  perplexing.1  The  uncertainty  con- 
stitutes one  of  the  difficulties  of  satisfying  the  canon 
of  equity.  Some  taxes  are  shifted  fraudulently  by 
evasion,  that  is  by  avoiding  the  payment,  as  by  giving 
a  false  return  of  income,  or  by  smuggling  to  escape  an 
import  duty.  Again,  the  effort  to  escape  from  the 

1  The  difficulty  of  tracing  the  exact  incidence  of  a  tax  is  so  great, 
owing  to  the  complexity  of  the  circumstances,  that  it  has  been  pro- 
posed by  Dr  Cannan  to  dismiss  the  term  "incidence"  altogether,  and 
confine  the  investigation  to  "  effects  "  ;  this  is  in  reality  all  that  can 
be  done,  but  the  term  "  incidence"  has  a  prescriptive  currency,  and 
it  has  also  a  useful  connotation. 

103 


INCIDENCE   OF   TAXATION  [CHAP. 

burden  of  a  new  tax  sometimes  leads  to  the  discovery 
of  a  substitute  for  the  commodity  taxed,  or  to  an 
improvement  which  cheapens  the  cost  of  production, 
or  effects  a  gain  by  an  economy  of  waste  power  or 
material,  possibly  exceeding  in  value  the  amount  of 
the  tax.  This  process  is  not  properly  a  case  of  the 
shifting  of  a  tax,  but  is  rather  a  new  step  in  economic 
development  and  one  of  the  many  forms  of  progress. 

In  the  economic  sense  "shifting"  is  passing  on  the 
tax  to  another  person,  as  the  importer  passes  on  an 
import  duty,  and  the  distiller  the  excise  duty.  Often 
by  the  mere  play  of  economic  forces  a  tax  is  in  part 
passed  on,  a  portion  being  borne  by  the  producer,  and 
the  remainder  being  borne  by  the  consumer  or  distributer. 
In  some  instances  even  more  than  the  tax  is  exacted 
from  the  consumer,  since  the  advance  of  a  tax  becomes 
an  outlay  of  capital  which,  like  the  other  elements  in 
capital  expenditure,  is  expected  to  bear  interest. 

In  the  mode  of  collection  of  sundry  taxes,  shifting  or 
transfer  is  designed.  It  is  expected  that  customs  and 
excise  duties  will  be  paid  by  the  consumers  of  the  goods  ; 
the  tax  is  levied  upon  the  importer  or  producer  for  the 
convenience  of  collection.  In  other  cases  the  shifting 
is  not  foreseen,  or  it  is  greater  or  less  than  was  con- 
templated, and  touches  interests  not  intended  to  be 
affected  by  its  imposition  ;  hence  the  dictum  that 
"  the  evil  of  many  taxes  is  in  their  indirect  effects  "  ; 
since  they  may  unintentionally  inflict  hardships  on 
individuals,  or  be  hurtful  to  production. 

A  tax  may  be  imposed  at  such  a  rate  as  to  add  to 
the  customary  selling  price  of  an  article  a  fraction  which 
will  cost  the  purchaser  of  small  quantities  more  than 
the  tax  ;  the  manufacturer  or  dealer  will  sell  the  article 

104 


vi.]  SHIFTING   OF    INCIDENCE 

at  a  price — the  nearest  fixed  unit  which  will  give  him 
a  profit  that  covers  the  tax ;  thus  the  consumer  pays 
more  than  the  tax,  while  the  Treasury  obtains  only 
the  tax  as  revenue,  and  the  dealer  or  middleman  gets 
the  excess  as  profit : — e.g.,  an  additional  tax  of  6d.  per 
Ib.  on  tobacco  might  add  £d.  to  the  selling  price  per 
oz.,  so  that  buyers  of  less  than  2  oz.  at  a  time  would 
pay  increased  duty  at  the  rate  of  8d.  per  Ib.  Or  it  may 
be  that  the  effect  of  an  additional  tax  is  to  reduce 
demand ;  the  producer  or  seller  is  then  compelled  to 
suffer,  either  in  a  reduction  of  business,  or  by  bearing 
part  of  the  tax.  In  the  simplest  case  of  a  duty  on  a 
commodity,  paid  primarily  by  the  maker  or  importer, 
the  tax  will  tend  to  be  moved  to  the  consumer;  but  it 
is  impossible  to  ascertain  with  absolute  certainty  on 
whom  the  tax  does  really  fall  in  every  case.  Incidence 
is  an  intricate  and  not  absolutely  determinable  problem. 
The  analysis  is  performed  by  examining  each  species 
of  tax  separately,  and  though  for  concrete  cases  we  get 
only  approximate  truth,  yet  the  conditions  can  be  stated 
and  an  abstract  doctrine  of  tendencies  can  be  established 
for  each  class. 

A  new  tax  has  both  an  immediate  and  an  ultimate 
effect.  Its  immediate  incidence  causes  a  disturbance 
which  is  followed  by  some  movement  towards  readjust- 
ment ;  the  nature  of  this  adjustment  and  the  time 
it  requires  depend  upon  the  freedom  and  extent  of 
competition,  and  upon  the  elasticity  of  supply  and 
demand.  Some  theories  of  taxation  deal  only  with 
ultimate  results  and  ignore  the  immediate  effects,  but 
meanwhile  taxes  have  to  be  paid,  and  their  immediate 
effects  may  operate  disastrously  before  adjustment  is 
attained,  for  "  taxes  tend  to  stick  where  they  fall "  :  i.e., 

105  o 


INCIDENCE   OF   TAXATION  [CHAP. 

it  takes  time  to  move  them  on,  since  economic  forces 
often  operate  slowly. 

The  ultimate  effect  may  be  very  different  from  the 
immediate  effect.  When  the  tax  is  shifted  from  the 
first  payer  to  the  distributer,  who  passes  it  on  to  the 
consumer,  it  is  called  forward-shifting ;  when  it  affects 
a  previous  agent  in  production  or  a  subsidiary  industry, 
it  is  called  backward-shifting ;  if  it  causes  a  rearrange- 
ment in  some  of  the  factors  of  production  and  dis- 
tribution it  is  said  to  be  diffused.  Observation  of  such 
cases  led  to  the  Diffusion  Theory,  which  maintains 
that  all  taxes,  no  matter  how  imposed,  are  ultimately 
spread  equitably  over  society  by  a  process  of  accom- 
modation, which  is  accomplished  through  the  action  of 
competition,  and  that  the  burden  of  taxation  is  thus 
fairly  distributed  by  a  portion  being  passed  on  until 
it  is  diffused  over  the  whole  community  in  proportion 
to  ability  to  pay. 

This  view  rests  solely  upon  the  consideration  of  taxes 
on  commodities,  which  are  indirect,  and  it  exaggerates 
the  effects  of  diffusion  even  as  regards  these.  But  a 
large  part  of  taxation  is  direct ;  it  falls  upon  income, 
upon  estates  at  death,  and  upon  acts  and  operations  in 
which  there  is  little  or  no  diffusion.  And  it  is  not  a 
matter  of  indifference  on  whom  a  tax  is  primarily 
levied,  as  it  would  be  if  the  ultimate  effects  were  always 
the  same.  All  proposals  for  new  taxation  encounter 
opposition  from  some  classes  who  feel  assured  that 
they  will  be  special  sufferers  thereby,  while  the  same 
proposals  are  easily  tolerated  by  those  who  deem  them- 
selves exempt  from  their  operation.  If  it  were  correct 
that  the  income-tax  which  is  levied  upon  a  limited  class 
of  the  community  is  diffused  over  all,  then  it  would  be 

106 


vi.]  SHIFTING  OF   INCIDENCE 

wise  to  exact  it  from  all  classes  directly,  and  thus  avoid 
the  loss  which  must  be  incurred  by  friction  in  the 
economic  transfer ;  further,  the  direct  demand  would 
secure  the  moral  advantage  of  bringing  home  to  the  real 
payers  the  effects  of  extravagance  in  national  expendi- 
ture. But  a  universal  income-tax  would  be  resented 
as  unjust  to  labourers,  and  indeed  the  chief  cause  of 
the  popularity  of  the  income-tax  is  the  fact  that  its 
incidence  is  upon  a  limited  [portion  of  the  community 
only. 

It  is  certain  that  some  kinds  of  taxation  impose 
heavier  burdens  than  others,  and  pressure  of  incidence 
can  be  modified  by  adopting  different  methods.  If  it 
were  not  so,  and  if  all  taxes  were  diffused  equally,  much 
thought  expended  upon  legislation  in  order  to  secure  an 
equitable  system  of  taxation  would  be  wasted  labour. 

Perfect  adjustment  of  taxation  is  unattainable  ;  some 
taxes  are  not  shifted  at  all,  others  are  distributed,  but 
according  to  no  principle  of  equity ;  the  conditions  of 
their  transfer  and  their  indirect  effects  constitute  the 
problem  of  incidence  to  be  investigated.  The  ascertain- 
ment of  these  tendencies  may  avert  injury.  Without 
it  the  hasty  imposition  of  a  tax  may  bring  injustice 
and  cause  economic  loss  to  small  industries  by  stamp- 
ing out  some  and  crippling  others,  for  a  small  margin 
often  determines  economic  existence.  But  the  aim  of 
taxation  is  revenue,  not  repression  of  industry,  and  a 
tax  that  entails  the  latter  consequence  fails  doubly  in 
its  object. 

Incidence  must  be  studied  in  its  effects  upon  con- 
sumption and  demand.  A  tax  imposed  upon  a 
commodity  is  generally  expected  to  be  added  to  the 
price,  and  to  be  recovered  ultimately  from  the  con- 

107 


INCIDENCE   OF  TAXATION  [CHAP. 

sumer ;  this  effect  presupposes  competition  at  all  stages, 
and  also  the  perfect  mobility  of  capital.  The  assumed 
economic  procedure  is  that  the  tax  reduces  the  profit 
of  the  producer  or  seller,  that  he  struggles  to  recover 
his  normal  rate  by  a  rise  in  price,  and  so  passes  on  the 
charge  to  the  consumer.  This  is  doubtless  the  general 
tendency,  but  there  are  many  obstacles  to  perfect  com- 
petition, and  the  effect  upon  demand  of  a  rise  in  price 
will  also  vary  with  the  nature  of  the  article. 

I. — If  the  taxed  article  be  a  necessary  or  a  relatively 
small  item  of  expenditure  the  tax  may  not  affect  con- 
sumption ;  in  such  a  case  the  demand  for  the  taxed 
article  is  inelastic,  so  that  its  production  and  sale  are 
not  affected,  and  the  tax  is  paid  by  the  consumer.  But 
since  the  increased  cost  of  obtaining  the  same  supply 
as  formerly  will  reduce  the  general  buying  capacity  of 
consumers,  it  will  affect  their  demand  for  other  articles  ; 
the  effect  of  the  tax  is  thus,  in  fact,  transferred  to  the 
producers  of  those  various  indefinable  articles  by  a 
reduction  in  the  demand  for  them,  which  will  tend  to 
lower  their  price.  Such  results  would  follow  a  rise  in 
the  price  of  bread,  caused  either  by  natural  scarcity  or 
by  the  imposition  of  a  tax.  Many  families,  in  order  to 
obtain  their  usual  supply  of  this  prime  necessary,  would 
be  compelled  to  cut  down  their  purchases  of  other  less 
necessary  articles ;  the  incidence  of  such  a  tax  is, 
therefore,  widely  diffused — that  is,  not  only  do  purchasers 
of  bread  suffer  in  a  diminished  power  to  buy  other 
articles,  but  the  producers  of  those  other  articles  suffer 
from  that  diminished  demand. 

II. — But  if  the  taxed  article  be  a  commodity  for 
which  there  is  a  substitute  or  which  is  not  a  necessary, 
an  attempt  to  recover  the  tax  by  a  rise  in  price  will  be 

1 08 


VL]  SHIFTING  OF  INCIDENCE 

followed  by  a  reduction  in  demand,  which  will  throw 
part  of  the  burden  of  the  tax  on  the  producers  by  a 
diminution  of  their  business.  The  producers  will  then 
either  revert  to  the  former  price  and  thus  bear  the 
tax,  or  they  will  strive  to  keep  up  an  increased  price ; 
in  either  case,  those  who  are  producing  the  article 
in  the  circumstances  of  least  advantage  and  making 
only  a  marginal  profit  will  suffer  most,  and  they  may 
even  be  driven  out  of  the  field,  thus  restoring  the 
balance  with  a  diminished  consumption  ;  the  surviving 
producers,  owing  to  the  consequent  increase  in  their 
business,  may  not  lose.  Again,  there  are  usually  many 
stages  in  production,  and  numerous  grades  of  inter- 
mediaries before  consumption  ;  and  if  competition  be 
imperfect  at  any  one  of  these  stages,  or  in  some  one 
grade  of  distributers,  the  weak  members  will  suffer ; 
but  if  some  one  of  the  intermediaries  (as,  e.g.,  an 
importer  or  dealer)  has  a  monopoly,  he  will  be  better 
able  to  pass  on  the  burden.  In  the  case  of  a  group  of 
commodities  which  are  alternatives  or  substitutes,  the 
imposition  of  a  tax  on  one  member  of  the  group  may, 
by  reducing  its  demand  and  increasing  the  demand  for 
others,  tend  to  cause  a  rise  in  their  prices,  i.e.,  to  spread 
the  tax  over  all. 

III. — If  the  article  taxed  be  a  producer's  or  dealer's 
monopoly  (the  case  of  trusts  and  combines)  and  the 
article  be  not  a  necessary,  the  tax  must  reduce  the 
profits  of  the  seller  on  the  supposition  that  the  price 
previously  exacted  measured  the  maximum  utility  to 
buyers.  In  such  a  case  there  is  no  real  competitive  price, 
but  the  monopolist  fixes  the  price  so  as  to  yield  him 
the  maximum  revenue ;  this  price,  therefore,  cannot  be 
raised  without  cutting  off  demand,  and  the  monopolist 

109 


INCIDENCE   OF  TAXATION  [CHAP. 

has  thus  to  choose  between  paying  the  tax  or  sub- 
mitting to  a  reduction  of  his  sales  ;  he  will  adopt  that 
course  which  will  give  him  the  largest  net  revenue. 
In  one  case  the  monopolist  pays  the  tax  ;  in  the  other 
the  tax  is  paid  by  those  who  continue  to  purchase  at 
the  enhanced  price,  and  the  monopolist  suffers  a  loss 
in  reduced  business.  If  the  article  is  one  much  in 
demand  the  monopolist  may  raise  the  price  in  the  hope 
that  it  may  occasion  an  agitation  for  the  repeal  of  the 
tax.  A  tax  on  a  monopolist  imposed  in  the  form  of 
a  tax  on  net  profits  is  like  a  tax  on  rent,  and  cannot 
be  shifted. 

Any  form  of  control  over  transit,  production,  or  an 
essential  factor  in  production,  which  confers  the  power 
of  excluding  competition,  enables  the  monopolist  to 
raise  price  at  the  cost  of  the  community.  But  a  country 
which  is  a  sole  producer  does  not  necessarily  get  a 
monopoly  price :  there  may  be  competition  among  its 
producers  as  exporters,  and  they  may  also  be  held  in 
check  by  possible  substitutes.  These  monopolies  are, 
however,  suitable  subjects  for  taxation  ;  but  it  is  often 
difficult  to  assess  monopoly-values,  and  to  discriminate 
between  the  results  of  monopoly  and  those  which  would 
be  the  effect  of  healthy  speculation,  as  in  the  absence  of 
competition  it  is  impossible  to  say  exactly  what  is  the 
true  competitive  price. 

Shifting  of  taxation  thus  depends  upon  the  effect 
of  the  tax  upon  price,  i.e.,  upon  supply  and  demand 
which  are  affected  by  price,  and  the  possible  fluctuations 
are  very  numerous.  The  principle  involved  is  general, 
and  applies  equally  to  all  cases  of  a  rise  in  value — to 
wages  and  profits  as  well  as  commodities — and  the 
effect  does  not  depend  upon  the  special  cause  which 


vi.]  SHIFTING  OF   INCIDENCE 

raises  value  ;  a  tax  operates  in  the  same  way  as  any 
other  element  in  increased  cost. 

A  pure  theory  of  value  presupposes  perfect  competi- 
tion, but  in  actual  cases  there  are  many  limitations  and 
impediments  to  mobility,  and  consequently  the  exact 
pressure  of  any  particular  tax  cannot  be  stated.  The 
problem  is  also  complicated  by  the  action  of  counter- 
acting forces :  e.g.,  a  tax  might  be  imposed  upon  bread 
at  a  time  when  abundant  harvests  tended  to  cause 
a  fall  in  price,  so  that  no  effect  on  price  might  be 
apparent. 

The  A  rea  of  Taxation,  or  degree  of  generality,  affects 
the  operation  of  a  tax.  If  a  tax  is  general,  as  in  the 
case  of  a  duty  on  tea  or  tobacco,  its  effect  follows  the 
ordinary  rule  of  a  rise  in  price ;  but  if  it  operates  over  a 
relatively  small  area  or  group  the  pressure  will  be  dis- 
tributed irregularly.  In  the  case,  for  example,  of  a  local 
rate  being  higher  in  one  parish  than  in  an  adjoining 
parish,  a  portion  of  the  taxed  community  may  migrate 
to  the  cheaper  locality,  and  thus  the  tax  will  operate  to 
extinguish  some  rents  and  lower  others  in  the  more 
highly  taxed  locality.  A  similar  result  would  follow  the 
taxing  of  one  only  of  a  group  of  alternative  articles 
of  consumption — e.g.,  raisins,  currants,  and  figs ;  tea, 
coffee,  and  cocoa ;  cotton,  woollen  and  linen  goods  ;  or  a 
tax  on  one  of  competing  forms  of  locomotion ;  or  one  out 
of  several  methods  of  production.  Part  of  the  tax  will 
in  all  such  cases  fall  on  the  producer  or  purveyor  of  the 
taxed  article  or  method.  The  alternative  articles  or 
methods  are  competitors,  and  the  effect  of  a  rise  in  the 
price  of  one  article  or  method  tends  to  divert  consump- 
tion to  the  untaxed  substitutes.  The  result  is  to  place 
capital  in  the  taxed  industry  at  a  disadvantage,  and 

in 


INCIDENCE   OF   TAXATION  [CHAP. 

in  time  it  will  be  reduced  by  the  elimination  of  the 
capital  employed  at  least  advantage  ;  so  that  finally 
the  capital  permanently  employed  in  the  taxed  employ- 
ment will  be  less,  the  price  of  the  article  will  again 
rise  slightly,  and  after  time  for  accommodation  a  new 
normal  will  be  established,  and  the  tax  shifted  to  the 
consumer.  It  is  impossible  to  trace  the  incidence  in 
its  various  stages  of  adjustment  in  such  cases  ;  the  im- 
mediate incidence  will  be  mainly  upon  the  producer  or 
dealer  in  the  taxed  article,  the  ultimate  incidence  will  be 
upon  the  consumer. 

The  effect  of  a  new  tax  may  be  disastrous  to 
specialised  capital,  which  has  no  mobility.  The  tend- 
ency of  the  new  tax  is  to  raise  prices,  and  thus  to  cut 
down  demand  ;  but  in  industries  with  large  fixed  and 
durable  capital  this  result  will  render  some  capital 
unremunerative  ;  it  may  be  a  less  evil  than  closing 
part  of  the  works  (and  thus  wasting  part  of  the  plant) 
for  producers  to  submit  to  bear  the  tax  until  some  part 
of  capital  is  withdrawn  from  their  industry;  thus  supply 
and  demand  in  the  trade  are  adjusted  at  a  new  level  by 
the  wearing  out  of  part  of  the  fixed  capital ;  for  this  will 
not  be  replaced,  and  gradually  profits  in  the  industry 
will  be  restored  by  the  flow  of  capital  preferentially 
to  industries  which  are  paying  better  profits.  The  net 
result  is  a  serious  temporary  loss  to  that  industry,  and 
to  the  industries  engaged  in  the  supply  of  its  machinery. 
This  examination  of  different  cases  of  shifting  points 
to  the  following  tendencies  : 

(i)  In   the   case   of  an   absolute   necessary  where 

demand    is    inelastic   the   new   tax    will    be 

added  to  the  price,  and  the  consumer  will 

pay  it ;   while  there  will  be  minor  indirect 

112 


vi.]  VARIOUS   CASES  OF   INCIDENCE 

effects  arising  out  of  his  diminished  buying 
power  in  general. 

(2)  In  the  case  of  ordinary  comforts  where  demand 

is  very  elastic,  a  small  rise  in  price  has  large 
effects,  and  may  seriously  cut  down  demand. 
A  new  tax  will,  in  this  case,  be  probably 
shared  primarily  by  producer,  dealer,  and 
consumer ;  ultimately,  when  supply  and 
demand  have  become  adjusted  to  the  new 
level,  the  tax  will  be  paid  mainly  by  the 
consumer.  In  cases  where  there  are 
alternatives,  or  when  subsidiary  or  com- 
plementary articles  are  involved,  a  tax  on 
one  commodity  by  a  rise  in  its  price  may 
increase  the  demand  for  the  others,  and  this 
may  send  up  their  price  in  some  degree. 

(3)  In  the  case  of  a  luxury  or  monopoly  in  which 

an  article  is  already  fetching  the  highest 
utility  price,  a  new  tax,  if  added  to  price, 
will  reduce  demand  ;  therefore,  the  producer 
or  controller  of  the  monopoly  will  most 
probably  pay  the  tax. 

(4)  When  production  takes  place  at  different  costs, 

the  tendency  of  the  tax  is  to  squeeze  out  the 
producer  on  the  margin  of  "no  profit";  while 
the  superior  producers  can  satisfy  the  whole 
demand  if  they  choose  to  pay  the  tax.  This 
may  lead  to  larger  production  by  the  reduced 
number  of  makers,  and  the  law  of  increasing 
returns  may  in  time  recover  to  them  the  loss 
occasioned  by  the  tax. 

(5)  If  a  tax  on  an  article   is   small   relatively  to 

the  cost,  the  law  of  inertia  may  prevent  its 
113  P 


INCIDENCE   OF  TAXATION  [CHAP. 

removal  to  the  consumer ;  the  possible  loss 
of  trade  involved  in  the  shifting  may  be  a 
greater  inconvenience  than  that  arising  from 
a  slight  reduction  of  profit ;  small  taxes 
tend  to  stick  where  they  fall. 

(6)  If    the    article    taxed     is    durable,    and    will 

consequently  make  many  successive  pay- 
ments (the  case  of  machinery),  and  if  the 
tax  be  appreciable,  the  tendency  will  be 
to  contract  demand,  and  thereby  to  affect 
injuriously  the  industries  concerned  in  its 
production.  Any  tax  which  falls  upon  fixed 
capital,  or  where  there  is  little  mobility,  is 
shifted  with  difficulty  and  very  slowly ;  it 
tends  to  remain  until  the  industry  is  narrowed 
down  by  gradual  wearing  out  of  plant,  when 
it  is  paid  by  the  consumer. 

(7)  Taxes    should    not    be    subject    to    frequent 

change ;  after  time  for  adjustment  to  a 
tax  the  pressure  is  accommodated,  and 
such  taxes  tend  to  become  no  taxes  by 
mere  adaptation  to  circumstances  in  most 
cases ;  but  this  is  not  universally  true, 
an  unjust  burden  does  not  become  just 
by  usage ;  in  some  instances  it  becomes 
accentuated. 

The  incidence  of  a  tax  on  wages  of  labourers  depends 
upon  its  effect  on  the  standard  of  comfort  which  the 
labourers  have  adopted.  This  standard  varies  greatly 
both  with  locality  and  individuals,  and  as  circumstances 
change  over  a  period  of  time  it  can  never  be  said  to  be 
absolutely  fixed.  In  the  case  of  the  wages  of  labourers 
actually  on  the  "  margin  of  subsistence  "  the  tax  would 

114 


vi.]  TAXES  ON   WAGES 

be  shifted,  since  by  the  hypothesis  the  wage  could  not 
be  reduced.  It  was  held  by  Adam  Smith  that  in  such 
cases  a  tax  would  operate  to  reduce  the  number  of 
labourers,  and  thus  the  tax  would  ultimately  be  moved 
either  to  the  employer's  profits  or  to  the  consumer  in 
higher  prices.  From  the  nature  of  the  case  the  operation 
of  the  shifting  of  the  tax  would  be  slow. 

If  by  a  tax  on  wages  the  labourers'  standard  of  living 
be  lowered  so  that  their  efficiency  is  also  reduced,  this 
will  react  on  the  value  of  their  work  ;  hence  ultimately 
the  tax  must  fall,  at  all  events  in  part,  upon  employers 
or  upon  the  rest  of  the  community.  In  the  case  of  the 
wages  of  skilled  labour  with  a  high  standard  the  tax 
will  be  moved  with  greater  difficulty,  until  at  the  stage 
when  the  labourer's  skill  gains  monopoly-value  the  tax 
falls  altogether  on  the  labourer.  In  the  wages  of  pro- 
fessional and  highly  skilled  labour  there  is  an  element 
of  quasi-rent  upon  which  the  tax  may  fall ;  the  more 
the  employment  partakes  of  the  nature  of  a  monopoly 
(whether  of  privilege  or  endowment),  the  more  does  the 
rent  factor  enter  in.  Competition  in  these  cases  is  for 
employment  and  position  rather  than  directly  for  wages  ; 
this  is  seen  forcibly  in  the  case  of  barristers,  medical 
men,  artists,  clergymen,  and  the  Civil  Service ;  it  applies 
similarly  to  the  more  highly  skilled  trades.  In  such 
cases  the  tax  cannot  be  shifted  directly,  but  it  will 
tend  to  limit  the  numbers  in  those  occupations.  In 
employments  where  rent  enters  less  into  wages,  and 
competition,  acting  through  supply  and  demand,  is  the 
agent  which  determines  the  standard  wage,  it  is  more 
possible  for  a  part  of  the  tax  to  be  thrown  upon  the 
community  in  higher  prices.  The  principle  involved 
is  the  same  as  in  the  case  of  commodities,  but  owing 


INCIDENCE   OF  TAXATION  [CHAP. 

to  the  greater  friction  in  the  play  of  economic  forces 
in  the  case  of  labour — from  want  of  mobility,  expense 
of  changing  employment  or  locality,  and  the  difficulty 
of  waiting — supply  and  demand  cannot  be  adjusted  as 
readily  as  in  the  case  of  commodities ;  consequently 
the  shifting  of  a  tax  is  slower  and  more  uncertain. 

A  tax  on  general  profits  is  a  tax  on  capital,  and 
cannot  be  directly  shifted ;  but  since  profits  vary 
greatly,  it  would  cause  disturbance  among  producers, 
and  might  squeeze  out  the  smaller  employers ;  also 
by  discouraging  saving  and  investment  of  capital  and 
causing  its  migration  in  search  of  better  returns,  it  might 
lead  to  a  rise  in  prices  and  a  diminution  of  employ- 
ment, and  thus  shift  part  of  the  tax  to  consumers, 
and  part  to  labourers  in  lower  wages. 

But  saving  is  now  influenced  by  other  motives  besides 
the  rate  of  interest,  and  the  history  of  the  last  half 
century  shows  that  it  has  increased  simultaneously 
with  a  fall  in  the  rate  of  interest ;  it  is  improbable, 
therefore,  that  employment  or  general  prices  would 
be  materially  affected.  A  tax  on  capital  is,  however, 
economically  harmful,  and  also  unfair,  as  being  a  penalty 
upon  thrift ;  it  is  not  very  probable  that  such  a  tax,  if 
general,  would  be  shifted.  A  tax  upon  the  profits  of 
special  industries  would,  however,  be  shifted  by  causing 
capital  to  move  by  preference  to  other  industries  not 
similarly  burdened,  prices  would  then  rise  in  the  taxed 
industry  until  it  became  equally  remunerative  and 
attractive  to  capital. 

Taxes  on  a  surplus  cannot  be  shifted,  thus  a  tax  on 
economic  rent  of  any  kind — agricultural  rent,  ground 
rent,  the  quasi-rent  element  in  profits  or  wages — would 
remain ;  the  only  forces  which  can  move  it  operate 

116 


vi.]  TAXES   ON   RENT 

indirectly  by  discouraging  in  some  cases  the  creation 
of  the  surplus.  In  the  case  of  the  rent  of  agricultural 
land  the  doctrine  is  that  competitive  rent  is  fixed  by 
the  margin  of  cultivation  ;  on  the  margin  the  whole 
produce  measures  the  cost  of  production  and  is 
absorbed  in  price  ;  and  in  this  case  there  is  no  rent  to 
be  taxed.  But  superior  land  pays  rent,  and  a  tax  on 
this  cannot  be  shifted ;  the  tax  cannot  touch  price, 
for  rent  does  not  enter  into  price ;  a  tax  on  rent 
thus  remains  with  the  rent  -  receiver.  The  same 
reasoning  applies  to  urban  ground-rents.  A  tax  on 
differential  ground-rents,  i.e.y  those  which  have  mono- 
poly value,  cannot  be  shifted  since  it  falls  on  a  surplus  ; 
a  tax  on  the  lowest  ground-rents  might  be  shifted  to 
the  tenant  since  there  is  no  building-land  which  does 
not  pay  a  minimum  rent.  As  has  been  already  stated, 
owing  to  the  imperfect  working  of  competition  these 
principles,  true  in  the  abstract,  are  tendencies  much 
modified  by  circumstances  in  individual  cases. 

Rent  of  land  is  not  in  all  cases  purely  a  surplus,  a 
part  is  due  to  the  investment  of  capital  in  improving 
the  land,  or  in  making  it  accessible  ;  rent  in  such  cases 
includes  interest  on  capital,  but  it  is  not  easily  separable 
from  the  "unearned"  rent,  and  a  special  tax  upon 
rent  would  fall  upon  both  alike.  If  a  tax  on  rent 
were  to  check  investment  of  capital  in  land-improve- 
ments, it  would  cause  the  tax  to  be  shifted  in  part  to 
the  consumer  by  a  rise  in  price ;  to  obtain  the  requisite 
supply  of  food  recourse  to  poorer  soil  may  be  necessary  ; 
with  a  fall  in  the  margin  of  production  the  law  of 
diminishing  returns  comes  into  operation ;  this  means  a 
higher  cost  of  production.  Thus  a  tax  on  rents  derived 
from  improvements  in  land  acts  as  a  tax  on  capital  sunk 

117 


INCIDENCE   OF  TAXATION  [CHAP. 

in   land,  and   tends  to   limit  such  investments  and  to 
raise  prices,  and  falls  to  that  extent  upon  consumers. 

The  same  reasoning  applies  to  that  portion  of  profits 
which  resembles  rent ;  it  arises  from  superior  skill  in 
management,  which  is  a  very  variable  faculty.  A 
tax  on  special  profits  which  touches  only  the  superior 
employer's  special  gains  will  not  be  shifted,  but  if  it 
reaches  the  lower  ranks  of  employers  where  this  kind 
of  profit  is  practically  nil,  it  may  drive  out  the  weak 
employer  altogether.  A  tax  on  profits,  therefore, 
presses  in  different  degrees  upon  employers,  and  its 
incidence  in  many  cases  would  be  transferred  in  part. 

A  general  property-tax  on  houses  is  at  its  first 
imposition  a  tax  on  a  special  form  of  capital,  and  will 
affect  the  supply  of  houses.  If  it  be  added  by 
the  owner  to  the  ordinary  house-rent  or  be  collected 
from  the  occupant,  it  will  tend  to  check  demand, 
and  this  will  react  in  discouraging  building.  If 
house  -  supply  be  inadequate  the  rent  may  be 
temporarily  increased  by  the  tax  until  supply  and 
demand  have  equated.  The  tendency  of  a  tax  on 
any  special  form  of  capital  such  as  house-property 
is  to  discourage  that  kind  of  investment ;  ultimately, 
when  profits  have  recovered  the  normal,  the  tax  will 
fall  upon  the  consumer  just  as  in  the  case  of  tea  and 
tobacco  ;  thus  in  the  long-run,  since  houses  are  articles 
of  universal  consumption,  a  tax  such  as  the  Inhabited 
House  Duty  falls  mainly  upon  the  occupier. 

A  tax  on  inherited  property  (estate  or  succession)  is 
a  tax  on  that  special  capital  at  transfer ;  it  cannot 
be  shifted,  and  falls  on  the  new  proprietor.  There 
are,  however,  indirect  effects  upon  capital  if  saving  be 
thereby  diminished. 

Ill 


vi.]  TAXES   ON   PROPERTY 

A  tax  on  personal  property  which  is  not  productive 
capital  cannot  be  shifted.    Such  property  being  used  for 
the  enjoyment  of  the  owner  (like  pictures,  jewellery, 
carriages  for  pleasure,  etc.)  is  not   sold,  transferred,  or 
employed    as    capital    under    competition,   hence    the 
tax    remains   with    the    consumer.      It    is    a    kind    of 
sumptuary  tax,  levied  mostly  as  a  direct  tax ;  such  are 
the  duties  on   guns,   dogs,  armorial  bearings.     In   the 
case  of  commodities  thus   taxed  (like  carriages),  there 
is   an   indirect   effect   in    the   tendency   to   reduce   the 
demand  ;  and  the  tax  when  first   imposed  may  injure 
the  industries  concerned,  though  ultimately,  after  time 
for  adjustment,  it  is  paid  by  the  consumer.     Such  taxes 
fall  only  upon  a  limited  class,  to  whom  the  motive  for 
the   enjoyment   of    the    special    luxury   or   distinction 
probably  appeals  more  than  the  cost  of  the  tax ;  hence 
the  elasticity  of  demand  is  very  slight.     Carriages  used 
for  business  purposes,  as  in  the  case  of  medical  men, 
form  part  of  their  capital  equipment ;   the  whole  cost, 
including  the  tax,  tends  to  affect  the  remuneration  of 
their  services,   and    therefore    indirectly   to   fall   upon 
their  clients  in  the  long  run. 

Special  taxes  on  property  such  as  the  land-tax,  when 
first  imposed,  fall  upon  the  owner.  A  purchaser  of  such 
property  will  pay  less  for  the  land  in  consequence  of 
the  tax  upon  it ;  the  seller,  therefore,  loses  the  capital- 
value  of  the  tax  in  the  sale ;  subsequent  holders  do 
not  in  effect  pay  the  tax,  since  it  was  eliminated  in  their 
purchase-price  of  the  land. 


CHAPTER  VII 

NATIONAL  DEBTS 

PUBLIC  debts  are  phenomena  of  modern  growth,  yet  so 
general  and  so  large  are  they  in  advanced  communities 
that  they  have  come  to  be  regarded  as  almost  a  mark 
of  progressive  civilisation.  The  old  established  countries 
of  Europe,  the  younger  republics  of  the  New  World, 
the  British  Colonies,  and  India,  have  all  alike  incurred 
these  liabilities.  The  public  loaning  system  is  an  out- 
come of  the  economic  developments  and  monetary 
methods  of  the  last  two  centuries  ;  the  large  use  of 
credit,  the  system  of  banking,  the  utilisation  of  small 
capitals  by  joint-stock  combination  in  carrying  out 
industry  and  commerce  on  a  gigantic  scale,  and  the 
many  facilities  for  employing  savings  to  advantage  by 
their  aggregation,  all  have  combined  to  create  a 
machinery  for  borrowing  and  lending  which  has 
become  of  vital  import  to  the  economic  condition  of 
a  country.  A  highly  organised  system  of  banking, 
the  money  market,  and  stock  exchange  are  parallel 
developments,  which  have  rendered  all  classes  familiar 
with  loaning  and  investment ;  the  application  of 
their  machinery  and  methods  to  public  expenditure 
was  inevitable.  Great  nations  and  small  states, 
colonies,  municipalities,  and  corporations  have  become 

120 


CHAP,  vii.]  NATIONAL  DEBTS 

borrowers,  and  public  expenditure  is  now  greatly 
dependent  in  cases  of  exceptional  outlay  upon  public 
loans. 

Public  debts,  like  taxes,  may  be  grouped  as  imperial 
and  local.  Loans  are  issued  by  both  states  and  local 
authorities,  and  a  large  percentage  of  the  stocks  quoted 
on  the  Stock  Exchange  are  those  of  states  and  corpora- 
tions. The  National  Debts  of  the  world  are  estimated 
at  more  than  £7 ,000,000,000 ;  of  these,  the  debt  of 
France  in  1904  amounted  to  £1,235,371,000;  that  of 
Great  Britain  in  March  1905  was  £755,072,109;  the 
debt  of  the  United  States  is  £200,000,000 ;  of  Germany 
£157,000,000;  of  Russia  more  than  £809,000,000. 
Australia  has  borrowed  £227,000,000;  New  Zealand 
£59,900,000;  Canada  £51,000,000;  India  £214,000,000. 
Local  debts  in  Great  Britain  also  are  rapidly  increasing, 
as  is  instanced  by  the  fact  that  the  Metropolis  (including 
the  County  Council  and  various  local  authorities)  has 
borrowed  more  than  £67,000,000,  and  the  total  out- 
standing loans  of  the  local  authorities  in  the  United 
Kingdom  amounted  to  £437,000,000  at  the  close  of  the 
year  1903. 

Formerly  states  accumulated  treasure  as  a  provision 
for  contingencies.  In  mediaeval  times  hoarding  was  a 
common  practice,  and  some  modern  nations  (Russia 
and  Germany)  still  maintain  the  same  method  of 
storing  up  bullion  and  coin  for  war  purposes.  Prior 
to  the  growth  of  the  credit  system  these  hoards  were 
the  only  reserves  immediately  available  in  war,  to 
provide  subsistence  and  staying  power,  and  to  carry  on 
offensive  and  defensive  operations.  The  early  English 
kings  obtained  private  loans  from  the  Jews,  Lombards, 
and  other  foreign  bankers,  or  extorted  from  their  subjects 

121  o 


NATIONAL   DEBTS  [CHAP. 

forced  loans  to  meet  emergencies.  Henry  VII.  hoarded 
the  wealth  which  his  son  scattered ;  the  Stuart  sovereigns 
borrowed  from  the  goldsmiths  and  bankers  ;  and  the  re- 
pudiation of  his  debts  by  Charles  II.  destroyed  the  royal 
credit,  and  practically  put  an  end  to  the  borrowings  of 
British  kings.  Following  the  example  of  Holland,  a 
system  of  pledging  the  credit  of  the  State,  in  the  form  of 
a  National  Debt,  began  soon  after  the  English  Revolution. 

The  hoarding  system  has  obvious  limitations  and 
drawbacks ;  reserves  in  time  of  peace  are  idle,  unpro- 
ductive, and  costly,  and  they  soon  become  exhausted 
when  the  occasion  for  their  use  arrives.  They  withdraw 
from  service  a  commodity  which  costs  much  to  obtain  ; 
they  also  affect  prices  by  raising  the  value  of  money, 
and  they  form  a  temptation  to  the  enemy  to  seize 
a  weapon  which  can  be  utilised  against  the  original 
owner.  Economic  science  has  shown  that  money  is 
best  left  "  to  fructify  "  by  use  in  the  hands  of  its  owners  ; 
if  required,  it  can  then  be  drawn  upon  in  the  form  of 
taxes  or  loans  ;  and  meanwhile,  wealth  is  better  engaged 
in  carrying  on  productive  industry,  which  will  add  to  its 
power  of  contributing  loans  for  public  wants  in  times 
of  need,  than  by  being  stored  away  in  guarded  cellars. 
The  real  reserve  of  a  nation  lies  in  its  power  to  subscribe 
to  taxes  and  loans,  that  is,  it  consists  of  the  revenue 
and  wealth  of  the  people,  and  this  is  better  accumulated 
as  active  capital  by  individuals  than  as  a  hoard  by  a 
government. 

In  an  age  of  expanding  industry  many  circumstances 
have  favoured  the  growth  of  the  loaning  system  and 
the  creation  of  National  Debts.  Such  debts  are  a 
mortgage  upon  the  wealth  and  industry  of  a  nation, 
secured  upon  its  taxes  and  future  revenue.  In  some 

122 


vii.]  GROWTH  OF   DEBT 

cases  special  taxes  are  set  apart  (ear-marked)  to  meet 
the  interest  on  loans ;  in  others  the  interest  becomes 
a  charge  upon  the  general  revenue  of  the  country. 

National  debts  are  largely  the  product  of  wars,  and 
they  have  been  increased  by  every  great  war.  The 
history  of  the  British  debt  illustrates  this  fact.  It 
commenced  after  the  Revolution  of  1688  with  a  floating 
debt  of  ,£1,000,000.  The  need  for  funds  to  carry  on  the 
war  with  France  led,  in  1694,  to  the  foundation  of  the 
Bank  of  England,  with  a  capital  of  £1,200,000,  which 
was  lent  to  the  Government  at  8  per  cent.  The 
neglected  debt  of  Charles  II.  was  taken  over  a  few 
years  later  at  £664,264  (half  the  original  sum)  as  a 
State  liability.  The  war  continued  to  make  fresh 
demands,  and  the  debt  accumulated,  until,  at  the  Peace 
of  Ryswick  in  1697,  it  amounted  to  £21,500,000 
In  1702,  at  the  death  of  William 

III.,  it  had  been  reduced   to     16,400,000 
In     1713,    after    the   war    of   the 
Spanish  succession  (Treaty  of 
Utrecht),  it  amounted  to     .     .     53,680,000 
In  1763,  at  the  end  of  the  "  Seven 

Years  War,"  it  was    ....    138,865,000 
In  1783,  after  the  War  of  American 

Independence,  the  debt  was       238,000,000 
In  1802,  at  the  Treaty  of  Amiens 
on  the  suspension  of  the  war 
with  France,  it  was     ....  537,650,000  . 
In  1815,  after  Waterloo  (Treaty  of 
Paris),  the  funded  and  floating 

debt  amounted  to 876,000,000 

In  1854,  before  the  Crimean  War, 

it  had  fallen  to 808,000,000 

123 


NATIONAL   DEBTS  [CHAP. 

In  1857,  after  the  Crimean  War, 
and    Indian    Mutiny,   it  had 

risen  to £838,918,000 

In  1899  it  had  become  reduced  to  627,562,000 
In  1903,  after  the  South  African 

War,  it  had  again  increased  to  770,778,762 
On  3  ist  March  1905  the  debt,  in- 
cluding funded  and  unfunded 
debt  and  capital  liability  for 
Terminable  Annuities,stood  at  755,072,109 
The   French    debt   has   grown  up  within   a  century 
to    £1,235,370,969,   of  which   three  -  fourths   has    been 
caused    by    war ; l    the    Franco  -  German    War    alone 
increased  its  amount  by  £340,000,000 ;  it  is  the  largest 
national  debt  in  existence,  and  costs  £38,350,000  per 
annum  in  interest.     On   the   other  hand,  the  debts  of 
India,  Australia,  and  Canada  have  been  incurred  mainly 
for  productive  purposes,  and  they  are  remunerative  in 
so   far  as   the   loans   have   been   well   expended.     The 
German   debt  is  mainly  productive,  and  is  represented 
by  a  large  material  asset  in  railways  and  other  public 
property ;  the  debts  of  corporations  are  mostly  created 
for  the  purpose  of  public  works  and  enterprises,  some 
of  which  yield  a  revenue. 

Loans  may  be  either  forced  or  voluntary.  Forced 
loans  are  in  effect  compulsory  taxes  exacted  from  a 
limited  class,  and  are  therefore  unjust.  The  methods 
of  some  early  English  kings  afford  examples  of  loans 
made  under  pressure,  and  the  system  may  be  said 
to  have  continued  down  to  the  time  of  the  Stuarts. 
France  in  1793  also  adopted  financial  measures  which 

About    £300,000,000    represents    State    interests    in    French 
railways. 

124 


vii.  FORCED  LOANS 

are  properly  described  as  forced  loans.  Sometimes 
appeals  for  advances  have  been  made  to  patriotism, 
as  in  1848  by  France  and  in  1870  by  Germany;  but 
such  measures  are  not  very  successful,  and  fail  to 
call  forth  a  hearty  response.  The  modern  kind  of 
"  forced  loan,"  most  frequently  adopted  in  a  national 
emergency,  takes  the  form  of  an  issue  of  inconvertible 
paper  currency,  and  many  states,  including  Great 
Britain  (1797-1821),  France  at  the  Revolution,  and 
the  United  States  during  the  Civil  War,  have  extended 
their  credit  by  this  means  under  pressure  of  the 
exigencies  of  war.  The  result  is  that  the  government 
secures  a  loan  without  interest  to  the  amount  of  the 
paper  issued,  but  the  nation  suffers  an  economic  loss 
through  the  rise  in  prices  which  usually  follows  as  an 
effect  of  the  addition  to  currency  ;  a  general  disturbance 
in  prices  and  foreign  trade  ensues,  and  metallic  money 
is  driven  out  to  equate  indebtedness.  But  inconvertible 
paper  seldom  stops  here,  it  is  almost  certain  to  be 
over-issued ;  then  its  value  immediately  falls,  and 
depreciation  continues  with  every  addition.  This  is 
a  great  national  misfortune :  the  whole  credit  fabric 
is  shaken,  trade  becomes  speculative,  a  commercial 
crisis  may  ensue,  and  in  any  case  financial  and  trade 
depression  follow ;  all  classes  of  creditors  suffer  loss, 
the  State  receives  its  taxes  in  the  depreciated  paper, 
and  when  the  period  of  redemption  comes  the  Govern- 
ment must  withdraw  its  paper  at  the  face  value,  or  inflict 
a  severe  blow  upon  its  credit  and  future  borrowing 
powers.  The  system  is  economically  disastrous ;  for 
the  purpose  of  obtaining  a  temporary  advantage 
great  dangers,  financial,  industrial,  and  social,  are 
incurred.  Nevertheless  most  great  powers  in  acute 

125 


NATIONAL   DEBTS  [CHAP. 

national    emergencies    have    had     recourse    to    paper 
issues. 

Voluntary  loans  are  of  several  kinds. 

(i)  A  perpetual  or  permanent  debt  is  a  public  loan 
on  which  the  government  undertakes  to  pay  an  annual 
interest,  but  does  not  promise  to  repay  the  principal 
at  any  particular  date :  it  becomes  in  effect  a  permanent 
annuity  of  which  the  holder  can  dispose  through  the 
agency  of  the  Stock  Exchange  at  its  market  value. 
The  State  may  redeem  the  debt  at  par  (unless  it  has 
undertaken  not  to  do  so  before  a  specified  date),  or  it 
can  extinguish  debt  when  funds  are  available  by  purchas- 
ing in  the  open  market.  This  is  the  most  convenient 
form  of  public  debt,  and  that  in  which  the  larger  loans  in 
Great  Britain  are  now  contracted.  It  is  called  Funded 
Debt  as  constituting  a  permanent  charge  upon  the 
consolidated  fund  or  permanent  revenue  of  the  country  ; 
the  English  debt  is  also  called  "  consols  "  from  the  fact 
that  a  number  of  loans  issued  at  different  rates  were 
unified  or  consolidated  into  3  per  cent,  stock  in  the 
year  1752,  and  further  consolidations  have  taken  place 
by  conversion  at  subsequent  periods. 

The  amount  of  British  funded  debt  in  1905  was 
£635,682,862.  The  great  merit  of  a  funded  debt  is 
that  the  country  knows  its  liabilities,  and  can  take 
suitable  measures  to  pay  its  interest  regularly  ;  it  can 
make  definite  arrangements  to  reduce  the  amount  of 
the  debt. 

Unfunded  or  Floating  Debt  consists  of  loans  for 
temporary  purposes,  repayable  at  fixed  dates  ;  they  are 
primarily  a  convenience  to  meet  the  needs  of  exchequer 
payments  while  taxes  are  coming  in  ;  such  demands 
arise  for  services  and  goods,  and  for  loans  made  by  the 

126 


vii.]  FORMS   OF  DEBT 

State  to  local  bodies,  and  their  payment  may  in  some 
cases  anticipate  the  periods  when  revenue  is  falling  due. 
Temporary  debt  is  generally  raised  in  the  form  of 
Treasury  Bills,  usually  of  short  date,  three,  six,  or 
twelve  months,  or  even  longer  periods  at  some  low  rate 
of  interest;  £21,000,000  of  such  Treasury  Bills  were 
in  circulation  on  3 1st  March  1905.  These  bills  are 
much  in  demand,  being  convenient  for  capitalists  whose 
money  is  thus  at  call ;  they  are  negotiable,  are  payable 
to  bearer,  pass  by  delivery,  and  may  be  paid  as  taxes. 
It  is  an  accepted  principle  that  unfunded  or  floating 
debt  should  be  kept  as  small  as  possible,  and  that  if 
circumstances  occur  which  render  the  debt  other  than 
temporary,  some  part  should  be  replaced  by  funding. 
Exigencies  arise  in  which  the  floating  debt  becomes 
exceptionally  large  and  the  time  period  is  extended; 
such  occasions  were  the  Franco  -  German  War,  the 
special  conversion  of  British  consols  (1889),  and  the 
recent  Boer  War.  Securities  for  special  service  called 
Exchequer  Bonds  are  then  created  at  a  fixed  rate  of 
interest  and  repayable  at  a  definite  period  ;  of  this  class 
are  the  South  African  War  Bonds  to  the  amount  of 
£30,000,000,  falling  due  in  1910.  A  further  temporary 
debt  of  £20,500,000,  repayable  in  1907,  incurred  under 
the  supplemental  War  Loan  Act  (1900)  for  permanent 
improvements  on  behalf  of  the  War  Office  and  Admir- 
alty, is  represented  by  Exchequer  Bonds.  This  form  of 
security  was  introduced  by  Mr  Gladstone  in  1853. 

Terminable  annuities  are  a  kind  of  sinking  fund  for 
converting  permanent  debt  into  temporary  debt  by 
capitalising  part  of  the  permanent  debt  and  paying  off 
both  capital  and  interest  automatically  in  a  fixed  period. 
The  capital  value  of  British  terminable  annuities  in 

127 


NATIONAL  DEBTS  [CHAP. 

1905  was  estimated  at  £47,756,246.  A  large  part  of 
these  annuities  consist  of  Post  Office  savings  banks  and 
Chancery  funds  which  have  been  invested  in  consols  by 
the  National  Debt  commissioners,  and  thus  portions  of 
these  stocks  have  been  commuted  by  being  converted 
into  terminable  annuities  which  expire  in  periods  of 
about  twenty  years.  The  sums  paid  annually  to  the 
account  of  the  Savings  Bank  and  the  estates  in 
Chancery  are  equal  to  the  interest  on  the  stock,  and 
an  amount  computed  to  produce  by  reinvestment  a 
sum  equal  to  the  original  permanent  stock  during  the 
period  the  annuity  has  to  run. 

To  the  nation  the  effect  is  that  during  the  interval 
taxation  is  increased  by  the  additional  payment,  and 
at  the  end  of  the  period  a  capital  portion  of  national 
debt  is  wiped  out.  The  principle  of  Terminable 
Annuities  was  definitely  adopted  by  Mr  Gladstone  in 
1868  ;  it  was  renewed  in  1884,  and  has  become  a 
recognised  means  for  reduction  of  debt. 

Public  loans  may  be  internal,  i.e.,  they  may  be  sub- 
scribed entirely  by  the  people  of  the  country ;  or  they 
may  be  external,  i.e.,  raised  wholly  in  a  foreign  country  ; 
or  they  may  be  held  partly  by  home  and  partly  by 
foreign  subscribers.  The  British  debt  is  mostly  internal. 
Loans  may  operate  (i)  to  absorb  savings  unemployed 
in  industry,  and  thus  utilise  for  government  purposes 
wealth  that  might  have  sought  some  speculative  invest- 
ment at  home  or  abroad ;  in  such  a  case  they  do  not 
reduce  the  active  capital  of  the  country ;  or  (2)  loans 
may  divert  wealth  from  private  productive  employment 
to  government  expenditure,  in  which  case  unless  the 
State  expenditure  is  for  productive  purposes  there  is 
a  diminution  of  industrial  capital. 

128 


VIL]  EXTERNAL   DEBT 

But  in  cases  where  loaning  would  be  a  drain 
upon  home  resources,  loans  are  generally  external ; 
/>,  poorer  countries  and  young  colonies  borrow  from 
richer  countries  and  take  some  of  their  surplus  savings. 
If  these  are  applied  in  the  borrowing  country  to 
enterprises  which  develop  its  resources,  the  loans 
increase  the  capital  of  the  world ;  the  interest  paid 
for  its  use  may  be  much  less  than  its  yield,  and  its 
economic  employment  thus  simultaneously  aids  in  the 
development  of  the  borrowing  country  while  enriching 
the  lending  country,  and  it  also  creates  an  extension  of 
international  trading  beneficial  to  both.  The  industrial 
development  of  India  and  Australia  has  been  greatly 
promoted  by  British  capital,  and  their  economic  progress 
affords  proof  of  the  beneficial  results  of  external  loans  to 
both  lending  and  borrowing  countries. 

The  debts  of  the  British  Colonies  have  been  mainly 
incurred  for  productive  purposes ;  roads,  railways, 
harbours,  irrigation,  and  many  other  useful  public  works 
have  been  created  by  their  aid :  the  progress  of  these 
countries  has  thus  been  hastened,  and  an  advanced 
stage  of  civilisation  more  rapidly  attained.  Facilities 
for  borrowing  with  indefinite  postponement  of  repay- 
ment have,  however,  this  danger,  that  they  tempt  to 
extravagant  schemes,  reckless  outlay,  and  speculative 
expenditure  upon  projects  which  may  turn  out  to  be 
premature  or  wholly  unproductive.  By  this  kind 
of  hurried  development  some  young  colonies  have 
burdened  themselves  with  heavy  taxation,  and  various 
young  republics  have  been  brought  to  national  bank- 
ruptcy and  repudiation  of  debt,  which  have  destroyed 
their  credit  and  placed  a  severe  check  upon  their 
prosperity. 

129  R 


NATIONAL  DEBTS  [CHAP. 

No  general  principles  can  be  laid  down  as  to  the 
expediency  of  national  loaning.  It  must  be  determined 
by  the  circumstances.  The  method  of  loaning  and  the 
provision  for  repayment  always  constitute  an  essential 
part  of  the  problem. 

It  has  been  urged  as  an  argument  against  loaning 
that,  in  the  absence  of  a  system  of  public  borrowing, 
the  expense  of  war  is  limited  by  the  capacity  for 
taxation ;  that  war  is  then  entered  upon  less  readily 
and  is  less  likely  to  be  protracted ;  while,  on  the 
other  hand,  the  simple  device  of  borrowing  with  the 
possibility  of  placing  a  large  part  of  the  burden  upon 
posterity  tends  to  cause  war  to  be  more  lightly 
undertaken  and  to  be  prolonged  unduly ;  moreover, 
it  is  held  to  be  unjust  that  any  generation  should 
inflict  upon  those  that  follow  the  burden  of  its  unpro- 
ductive expenditure.  Since  it  may  be  assumed  that 
posterity  will  have  its  own  difficulties  and  burdens, 
it  is  neither  generous  nor  patriotic  to  pass  on  to  it  a 
legacy  of  debt  created  by  the  imprudence  or  ambition 
of  the  present  generation.  Inherited  incumbrances  do 
not  make  for  the  stability  of  either  families  or  nations. 

So  conclusive  is  this  argument  that  only  great 
threats  to  national  existence,  struggles  for  national 
independence,  and  unavoidable  wars  would  seem  to 
justify  a  nation  in  casting  permanent  burdens  of  debt 
upon  succeeding  generations.  If,  however,  a  national 
crisis  occurs,  or  some  great  principle  is  at  stake  which 
will  affect  the  future  of  the  country  indefinitely,  it  may 
be  right  that  posterity  should  share  the  cost ;  it  cannot 
share  the  misery  of  the  conflict.  Further,  a  nation 
under  the  strain  of  a  great  struggle  may  reach  the  limit 
beyond  which  further  taxation  would  be  unendurable, 

130 


vii.]  BURDEN  OF  DEBT 

or  perhaps  fatal  to  its  economic  stability ;  debt  is 
then  the  only  alternative.  But  it  is  a  wise  policy  that 
each  generation  should  pay  its  own  way  in  all  matters 
of  expenditure  which  cannot  be  shown  to  be  cases 
analogous  to  permanent  investment  of  capital.  Adam 
Smith  and  David  Hume  expressed,  in  their  day,  great 
alarm  at  the  growth  of  the  debt,  which,  they  thought, 
portended  national  bankruptcy.  Macaulay,  at  a  later 
period,  regarding  with  satisfaction  the  rapidly  growing 
wealth  of  the  community  and  the  general  improvement  in 
the  standard  of  living,  rather  ridiculed  these  predictions, 
maintaining  that  national  resources  had  increased  faster 
than  indebtedness,  and  that  the  real  burden  of  the 
debt  was  diminishing.  This  comparison,  ignorantly 
misunderstood,  led  to  the  adoption  of  the  absurd  view 
that  the  British  debt  was  actually  a  cause  of  national 
progress ;  it  was  maintained  that  the  nation  had  only 
lent  to  itself,  and  had  thereby  created  a  fund  which  was 
a  source  of  wealth.  A  debt  incurred  in  order  to  procure 
productive  capital  for  a  young  and  vigorous  country,  well 
supplied  with  labour  and  productive  land,  but  lacking 
the  means  for  its  development,  may  become  a  source 
of  wealth  from  the  same  causes  that  enable  all  well- 
employed  capital  to  increase  wealth ;  but  in  any  other 
sense  a  debt  can  be  nothing  but  a  burden  to  a  country, 
just  as  a  private  debt  is  a  liability  to  an  individual. 
The  British  nation  pays  some  .£22,000,000  annually 
in  taxation,  as  a  consequence  of  debt  incurred  for 
expenditure  on  wars  a  century  ago.  The  necessity  for 
such  taxation  can  hardly  be  regarded  as  a  national 
advantage,  even  if  the  interest  is  paid  to  British  citizens 
who  expend  their  dividends  at  home.  The  inevitable 
conclusion  is  that  measures  should  be  adopted  for  the 


NATIONAL  DEBTS  [CHAP. 

reduction  and  ultimate  extinction  of  the  debt.  True, 
the  burden  becomes  relatively  lighter  with  the  growing 
prosperity  of  the  nation,  and  its  severity  is  much  less 
felt  when  spread  over  42,000,000  people  with  the 
present  national  income  than  it  was  in  1815,  when  the 
population  counted  only  some  15,000,000  people  with 
relatively  much  smaller  resources ;  the  diminution  in 
the  relative  burden  of  the  debt  is,  however,  an  argu- 
ment in  favour  of  making  some  sacrifice  for  its  capital 
reduction.  Considering  the  great  increase  in  the  wealth 
of  Great  Britain,  the  debt  has  been  reduced  very  slowly. 

It  has  been  advanced  as  an  argument  against  the 
reduction  of  the  debt  that  the  stock  forms  a  convenient 
and  safe  security  for  the  investment  of  Trust  funds, 
and  for  the  reserves  of  bankers,  insurance  societies, 
Post  Office  savings  bank,  etc.  But  it  is  no  necessary 
function  of  a  government  to  provide  such  security,  nor 
is  the  service  economically  necessary.  Numerous  other 
investments  suitable  for  these  purposes  exist  in  India 
Stock,  Corporation  Stocks,  Colonial  Inscribed  Stocks, 
and  Debentures  and  Guaranteed  Railway  Stocks,  etc. ; 
and  there  is  a  constant  addition  to  this  field  for 
investment  with  the  growth  of  municipal  undertakings, 
the  development  of  the  Colonies,  and  the  increase  of 
population. 

Loans  are  issued  (a)  by  a  direct  appeal  for  sub- 
scriptions, (ft)  or  by  negotiation  through  a  banker  or 
group  of  capitalists ;  the  latter  is  usual  in  the  case  of 
foreign  loans.  The  rate  at  which  they  are  offered 
depends  on  the  credit  of  the  government,  and  its 
estimate  of  the  money  market,  the  current  rate  of 
interest,  the  circumstances  at  the  time  of  issue,  and 
the  conditions  of  repayment.  Loans  may  be  offered 

132 


vii.]  MODES  OF   ISSUING   LOANS 

at  a  fixed  price,  or  to  the  highest  bidders  with  a 
minimum  limit  They  may  be  effected  at  par,  below 
par,  and  above  par.  Sometimes  a  government  finds 
great  difficulty  in  borrowing  at  a  moderate  rate,  and 
then,  rather  than  pay  a  high  rate,  it  elects  to  create  a 
debt  of  a  higher  nominal  capital  than  the  sum  it  receives 
in  order  to  keep  down  the  denomination  of  the  loan  ; 
the  system  throws  a  greater  burden  upon  posterity,  and 
prevents  the  advantage  which  might  be  obtained  by 
conversion  of  the  debt  at  a  future  time.  As  examples  : 
for  £334,500,000  stock  created  by  Pitt  at  low  denomina- 
tions the  government  received  only  £200,000,000  in  cash ; 
the  1904  Russian  loan  raised  in  France  was  a  5  per  cent, 
loan,  issued  at  95,  repayable  at  par  in  five  years,  and 
accompanied  by  a  stipulation  that  a  large  part  of  the 
loan  should  be  taken  in  goods  from  France.  In  each 
of  these  cases  the  borrowing  government  undertook  to 
pay  back  a  much  larger  sum  than  it  received,  and  this 
was  done  to  keep  down  the  immediate  rate  of  interest. 
Had  the  loan  in  each  case  been  effected  at,  or  below 
par  with  a  higher  rate,  the  immediate  burden  on  the 
borrowing  country  would  have  been  greater,  but  when 
the  crisis  had  passed  and  an  interval  had  elapsed, 
during  which  the  borrowing  country  regained  pros- 
perity and  credit,  the  stock  would  rise  in  price ;  the 
government  could  then  convert  the  loan  into  one  of 
a  lower  denomination,  that  is,  either  it  could  reduce 
the  rate  of  interest  by  effecting  a  cheaper  loan  with 
which  to  pay  off  the  former  loan,  or,  what  is  more 
usual,  the  holders  of  the  loan  would  accept  the  lower 
rate  then  offered  as  representing  its  improved  value 
at  the  current  rate  of  interest.  This  process  of  con- 
version has  been  frequently  accomplished.  It  was 


NATIONAL  DEBTS  [CHAP. 

commenced  in  England  as  early  as  1714;  the  largest 
amount  so  dealt  with  at  any  one  time  was  the  con- 
version by  Mr  Goschen,  in  1889,  of  £558,000,000  British 
3  per  cent,  stock  to  2f  per  cent,  for  14  years,  the  rate 
to  be  then  reduced  to  2\  per  cent.  This  operation  took 
place  in  a  time  of  peace  and  prosperity,  when  govern- 
ment credit  was  high,  and  when  the  normal  rate  of 
interest  had  been  so  low  for  a  long  period  that  it 
seemed  to  have  fallen  permanently  to  a  lower  level. 

It  is  impossible  to  compare  with  any  degree  of 
exactness  the  burden  of  debt  in  different  countries ; 
neither  the  amount  of  debt  per  head  of  population 
nor  the  rate  of  interest  is  any  criterion.  Debts 
may  pay  different  rates  of  interest,  but  the  severity 
of  the  burden  must  also  be  relative  to  the  density  of 
the  population  and  the  degree  of  prosperity,  to  the 
standard  of  living  and  earning  power,  and  the  national 
resources  of  each  country ;  further,  it  is  very  necessary 
to  distinguish  remunerative  from  non-remunerative  debt. 
The  debt  of  Great  Britain  amounts  to  about  £17,  IDS. 
per  head  of  population,  that  of  India  to  about  145. 
per  head,  but  the  average  income  in  Great  Britain  is 
many  times  greater  than  the  average  income  in  India. 
On  the  other  hand,  a  large  part  of  Indian  debt  represents 
productive  works  (railways  and  irrigation),  while  no 
part  of  the  British  national  debt  can  properly  be  said 
to  yield  revenue.  The  debt  of  New  Zealand,  raised 
mainly  in  Great  Britain,  amounts  to  some  £66  per 
head  of  population,  but  a  considerable  part  of  it  is 
productive.  It  is,  however,  an  extravagant  debt  for  so 
small  a  colony,  even  though  the  natural  productiveness 
of  the  country  be  great. 

Methods  for  Reduction  of  Debt. — Some  countries  have 

134 


vii.]  REDUCTION   OF   DEBT 

adopted  violent  methods  for  the  diminution  of  their 
debt,  and  have  attained  their  aim  by  repudiation,  or 
by  forcible  reduction  of  interest.  Usually  this  act  is 
preceded  by  gross  public  extravagance,  revolution,  or 
desolating  war.  There  is  no  remedy  against  a  defaulting 
or  repudiating  state,  unless  by  force  or  by  appropriation 
of  its  territory.  The  repudiation,  apart  from  its  moral 
aspect,  is  a  case  of  national  bankruptcy  both  of  means 
and  character ;  it  becomes  a  check  to  development 
and  trade,  and  is  a  destruction  of  national  credit  for 
the  future ;  and  it  is  as  impolitic  as  it  is  dishonest. 

The  principle  of  applying  any  casual  surplus  revenue 
as  a  kind  of  sinking  fund  for  the  reduction  of  debt 
was  adopted  very  early.  It  is,  however,  a  slow  and 
very  inadequate  method,  since  in  some  years  there 
may  be  a  deficit,  and  unless  the  revenue  be  arranged 
to  yield  a  surplus  annually,  no  definite  amount  can  be 
calculated  upon  for  reduction. 

The  British  practice  is  to  provide  in  the  Budget  for 
a  fixed  sum  to  be  set  apart  annually  for  the  payment 
of  interest  on  the  debt,  and  as  a  sinking  fund  for  the 
redemption  of  part  of  the  principal.  This  method  has 
been  systematically  adopted  since  1875,  when  the  sum 
so  appropriated  was  ^28,000,000.  The  original  amount 
has,  however,  suffered  several  reductions  at  the  hands  of 
subsequent  Chancellors  on  the  ground  of  the  pressure 
of  exceptional  expenditure,  and  the  fund  for  repayment 
has  been  entirely  suspended  on  several  occasions. 

Pitt's  sinking  fund  of  1786,  based  on  the  calculations 
of  a  certain  Dr  Price,  was  a  financial  delusion.  Its 
principle  was  that  the  government  should  apply  annually, 
through  a  board  of  commissioners,  a  sum  of  .£1,000,000 
to  the  purchase  of  stock  which  was  to  accumulate  at 


NATIONAL   DEBTS  [CHAP. 

compound  interest  until  it  equalled  and  wiped  out  a 
certain  amount  of  debt ;  and  it  was  decided  that,  as  a 
provision  for  repayment,  all  future  debts  were  to  be 
accompanied  with  a  similar  sinking  fund.  It  was  not 
until  1819  that  the  absurdity  of  this  method  of  merely 
taking  money  out  of  one  pocket  in  order  to  transfer 
it  to  the  other  was  clearly  understood.  The  fallacy 
was  fully  exposed  by  David  Ricardo,  and  this  form  of 
sinking  fund  was  abolished  in  1829. 

At  one  time  the  doctrine  was  prevalent  that  particular 
taxes  should  be  set  apart  for  the  repayment  of  debt. 
Indeed  Walpole,  in  1716,  charged  certain  revenues 
with  annuities  for  this  purpose.  At  a  later  period  it 
was  proposed  to  assign  the  Death  Duties  to  the 
reduction  of  debt,  and  this  idea  was  much  favoured  by 
Mr  Gladstone.  It  has  also  been  suggested  that  the 
Land  Tax  should  be  redeemed,  and  that  the  capital 
sum  so  obtained  should  be  devoted  to  reduction  of 
debt ;  but  neither  proposal  has  been  adopted. 

It  is  obvious  that  a  systematic  and  persistent  method 
is  necessary  if  any  real  reduction  is  to  be  secured  ; 
debt  is  an  evil  to  a  nation  as  to  an  individual,  and 
though  the  burden  becomes  more  tolerable  as  the 
nation  grows  wealthier,  debt  is  not  an  institution  to 
be  upheld.  The  nation  should  insist  upon  paying  off 
a  definite  amount  annually,  and  in  times  of  prosperity 
it  should  make  specially  large  contributions  to  that 
end.  Every  war  has  increased  the  debt ;  the  South 
African  War  added  about  ;£  1.60,000,000,  and  for  the 
time  put  a  check  upon  the  reduction  of  the  debt  while 
it  has  practically  wiped  out  the  reductions  of  the  pre- 
vious thirty  years.  This  set-back  only  renders  systematic 
treatment  in  periods  of  peace  the  more  urgent. 

136 


VIL]  REDUCTION   OF   DEBT 

Some  economists  have  argued  that  so  long  as  any 
undesirable  form  of  taxation  remains,  it  is  better  for  a 
country  to  remit  the  tax  than  to  reduce  its  debt.  On 
this  it  may  be  remarked  that  if  taxation  is  oppressive 
it  will  be  difficult  without  effecting  economies  to  raise 
further  taxes  for  any  purpose,  and  reform  of  taxation 
is  in  such  a  case  essential.  If  the  system  of  taxation 
is  unjust  it  should  be  brought  into  conformity  with 
established  principles  and  canons  of  taxation  ;  but  this 
is  a  matter  quite  distinct  from  the  question  of  the 
amount  or  object  of  the  taxation.  And  in  any  case 
the  existence  of  a  debt  entails  taxation  for  payment 
of  the  interest,  and  a  reduction  in  its  amount  at  any 
opportunity  will  be  a  method  of  reducing  future 
taxation  for  interest  on  the  debt.  The  system  of 
Terminable  Annuities,  explained  above,  is  one  mode 
of  extinguishing  a  portion  of  debt  by  a  special  effort 
extended  over  a  period  of  years.  The  proposal  of  a 
general  contribution  to  pay  off  the  debt  is  scarcely 
worthy  of  consideration.  It  implies  either  that  the 
whole  community  shall  contribute  capital,  which  is 
impossible ;  or  that  the  burden  is  to  be  borne  entirely 
by  those  who  possess  property,  which  is  not  only  unjust, 
but  also  impracticable,  since  the  majority  would  need 
to  incur  private  debts  at  higher  rates  in  order  to  pay 
off  their  share  of  the  National  Debt. 

The  method  of  conversion  already  described  is  a  most 
effective  mode  of  reducing  the  capital  amount  of  the 
debt,  provided  that  the  reduction  of  the  rate  of  interest 
is  not  accompanied  by  an  addition  to  the  nominal 
amount  of  debt  by  means  of  bonuses  granted  in  order 
to  make  the  lower  rate  acceptable.  The  credit  of 
the  State  and  the  circumstances  of  the  money  market 

13?  s 


NATIONAL   DEBTS  [CHAP. 

ought  to  be  such  as  to  warrant  the  conversion  to  a  lower 
denomination.  This  enables  the  gain  by  reduced 
interest  to  be  applied  to  the  reduction  of  principal  under 
that  system  of  sinking  fund  which  devotes  annually 
a  certain  fixed  amount  to  the  purposes  of  the  debt. 

The  great  extension  of  municipal  government  in 
recent  years  has  called  into  existence  a  new  kind  of 
national  debt,  or  rather  a  group  of  public  debts,  for 
local  purposes.  These  debts,  which  have  increased 
rapidly  since  the  Local  Loans  Act  of  1875  enabled  local 
authorities  to  borrow  in  the  open  market,  amounted 
for  the  year  1903  to  more  than  £437,000,000  in  the 
United  Kingdom  ;  of  this  sum  the  metropolitan  loans 
account  for  over  £67,000,000.  The  total  amount  raised 
for  local  purposes  in  the  United  Kingdom  in  1903 
was  £152,290,000,  and  of  this  sum  nearly  £40,000,000 
was  obtained  from  loans.  Local  expenditure  has 
received  aid  from  State  loans  under  special  Acts  of 
Parliament  from  1792  ;  repayment  was  formerly  allowed 
over  lengthened  periods,  some  extending  even  to  a 
hundred  years,  but  since  1875  local  loans  have  been 
issued  under  regulations  administered  by  the  Local 
Government  Board,  which  requires  a  sinking  fund  to 
be  provided  with  each  issue  so  as  to  redeem  the  debt 
in  some  moderate  period,  generally  about  thirty  years. 
In  1887  the  loans  thus  made  by  the  Treasury  for 
local  purposes  were  separated  from  the  National  Debt 
and  were  created  into  a  Local  Loans  Stock.  The 
credit  of  Corporation  Stocks  stands  high,  and  they  are 
now  included  in  the  Trust  Funds  Act.  The  rates  vary 
from  3  to  3^  per  cent. 

By  far  the  greater  part  of  local  debt  is  urban,  and 
is   due   to   municipal  activity.     About  one-half  of  the 

138 


vii.]  LOCAL  LOANS 

debt  represents  remunerative  outlay  on  water,  gas, 
and  electric  lighting  works,  harbours,  docks,  quays, 
piers,  tramways,  etc.,  which  yield  a  revenue,  and  in 
some  cases,  a  profit;  any  deficit  has  to  be  made  up 
from  rates.  Another  large  section  of  the  debt  is  due 
to  expenditure,  which,  though  not  revenue  -  yielding, 
is  yet  essential  and  directly  beneficial  to  society :  such 
is  the  expenditure  upon  schools,  infirmaries,  asylums, 
workhouses,  public  offices,  baths,  libraries,  and  fire- 
stations.  The  remainder  is  occasioned  by  other  works 
of  public  utility  or  for  health,  such  as  drainage,  roads, 
parks,  bridges,  open  spaces,  artisans'  dwellings,  etc. 

The  loaning  system  encourages  public  outlay  upon 
improvements  by  the  facility  with  which  it  enables 
capital  to  be  obtained  ;  the  system  is  open  to  abuse,  and 
loans  have  grown  with  alarming  rapidity.  The  danger 
is  that  it  renders  extravagance  easy,  and  by  placing 
the  burden  upon  the  future,  it  favours  a  tendency  of 
public  authorities  to  embark  upon  enterprises  of  a  more 
or  less  speculative  character.  Some  of  these  are  industrial 
undertakings  which  it  might  be  more  expedient  to 
leave  to  private  capital  and  risk,  but  over  which  the 
public  could  retain  some  control.  Heavy  burdens  have 
in  consequence  been  imposed  upon  some  localities  for 
repayment  of  capital  and  interest  which  tend  to  check 
their  progress  and  place  their  industries  at  a  dis- 
advantage when  competing  with  less  heavily  taxed 
localities. 

The  practice  of  loaning  needs  to  be  exercised  with 
much  discretion  ;  it  is  reasonable  that  expenditure  upon 
desirable  public  works  of  a  durable  character  should 
be  spread  over  a  period  which  represents  their  fullest 
utility ;  on  the  other  hand,  that  period  should  be 


NATIONAL  DEBTS  [CHAP.  vn. 

carefully  limited,  since  fresh  demands  for  expenditure 
constantly  arise,  and  each  generation  will  experience 
new  wants  and  will  have  to  meet  new  claims  upon 
its  income. 

The  incidence  of  interest  and  repayment,  as  of  all 
rates,  is  mainly  upon  occupiers  of  houses,  etc.,  and  in 
part  on  ground  landlords  ;  heavy  taxation  may  drive 
away  some  of  those  rate-payers  who  can  change  their 
locality,  and  may  leave  the  burden  to  those  less  able 
to  move.  The  maxim  "  festina  lente "  applies  to 
corporations  and  to  young  colonies  alike  in  their 
eagerness  for  development.  The  power  of  borrowing, 
if  exercised  moderately  and  in  order  to  provide  the 
power  of  judicious  expenditure,  may  become  an  instru- 
ment of  rapid  advancement ;  but  if  practised  in  excess, 
or  for  purposes  of  outlay  upon  schemes  of  a  speculative 
character,  it  may  entail  a  heavy  drain  upon  the 
resources  of  the  district,  and  thus  exhaust  the  wealth 
which  would  otherwise  have  made  for  its  progress 
and  development. 


140 


CHAPTER    VIII 

SOME  OTHER   REVENUE  SYSTEMS 

IN  an  earlier  chapter  it  was  remarked  that  taxation 
is  not  merely  an  abstract  problem ;  the  system  of 
any  country  must  be  relative  to  the  historic  evolution 
and  existing  circumstances  of  that  country.  Actual 
taxation  is  determined  to  a  large  extent  by  local 
conditions  and  possibilities,  and  these  bring  into  strong 
relief  many  facts  which  are  more  or  less  peculiar  to 
the  individual  case.  Guiding  principles  do  not  vary ; 
the  classic  canons  of  taxation  are  not  superseded, 
but  their  application  is  controlled  by  special  causes 
operating  in  each  case. 

A  brief  account  of  the  systems  of  taxation  which 
obtain  in  two  other  important  countries,  India  and 
France,  will  offer  a  comparison  which  will  illustrate  this 
statement.  India  is  a  country  about  half  as  large 
as  Europe,  extending  over  an  area  of  1,767,000  sq. 
miles  (including  the  native  states),  and  peopled  by 
294,000,000  inhabitants  of  many  races  and  languages, 
of  whom  only  some  240,000  are  Europeans.  It  is 
important  to  remember  that  two-thirds  of  the  popula- 
tion are  dependent  on  agriculture,  living  at  a  scale  of 
comfort  very  low  indeed  when  compared  with  European 
standards,  and  mainly  governed  in  their  occupations 

141 


SOME  OTHER   REVENUE   SYSTEMS      [CHAP. 

and  modes  of  life  and  thought  by  ancient  custom,  caste, 
and  tradition. 

For  the  year  1903-4  the  revenue  and  expenditure  of 
India  were  as  follows  : 


GROSS  NET 

Revenue          £83,756,000  \  £46,844,000 
Expenditure       80,760,000  J      43,848,000 


The  difference  between  the  gross  and  net  figures  is 
accounted  for  by  the  fact  that  the  government  of  India 
expends  a  very  large  amount  upon  productive  works 
(railways,  irrigation,  canals,  etc.)  for  the  development 
of  the  country,  and  that  the  total  receipts  and  pay- 
ments on  account  of  these  appear  under  the  gross 
revenue  and  expenditure.  In  Great  Britain  enterprises 
of  this  kind  are  carried  out  by  private  capital ;  in  India 
there  is  little  native  capital  or  enterprise ;  consequently 
the  duty  of  stimulating  progress  and  advancing  the 
economic  conditions  falls  mainly  upon  the  rulers  of 
that  country.  Deducting,  therefore,  the  receipts  and 
charges  arising  out  of  these  necessary  and  remunera- 
tive undertakings,  and  also  those  connected  with  the 
cultivation  and  manufacture  of  opium,  we  obtain  the 
net  revenue  and  expenditure  which  afford  the  best 
index  to  the  financial  position  of  India. 

NET   REVENUE,    1903-4 

Land  Revenue £18,509,000 

Forests 1,477,000 

Tributes  from  Native  States                 .  411,000 

Opium 3,506,000 

142 


VIIL]          THE   INDIAN   REVENUE   SYSTEM 

Taxes — 

Salt.         .         .  £4,982,000 

Stamps     .         .  3,538,000 

Excise      .         .  4,933,000 

Provincial  Rates  2,822,000 

Customs  .         .  3,838,000 

Assessed  Taxes  1,207,000 

Registration      .  326,000 

£21,646,000 

Commercial  Undertakings — 

Post  Office        .       £104,000 
Telegraph          .  59>ooo  (deficit) 

Railway  Revenue       861,000 
Irrigation  .         .          231,000 

1,137,000 

Miscellaneous — 

Mint,  Exchange,  etc.       .         .         .  158,000 


£46,844,000 

NET   EXPENDITURE,    1903-4 

Interest  on  Ordinary  Debt  (excluding 

Railway  Debt)        ....  £801,000 

Army  and  Military  Works           .         .  17,793,000 

Collection  of  Revenue          .         .         .  4,938,000 

Civil  Services 18,214,000 

Famine  Relief      .....  906,000 

Provincial  Balance       ....  1,196,000 


£43,848,000 

It   will    be    seen    that   land   is   the  chief  source   of 
revenue,  and  it  yields   about  42^  per  cent,  of  the  net 

MS 


SOME   OTHER   REVENUE    SYSTEMS     [CHAP. 

revenue;  taxation  of  various  kinds  gives  £2 1,500,000, 
or  46  per  cent,  leaving  £6,500,000,  or  ii£  per  cent, 
from  all  other  sources  ;  of  the  last  item  more  than  half 
is  raised  from  opium,  and  is  paid  by  foreign  purchasers 
of  the  drug ;  the  remaining  portion  of  the  revenue 
arises  from  government  enterprises  of  a  productive  or 
commercial  character  (railways,  etc.).  The  govern- 
ment now  owns  nearly  all  the  railways,  and  a  very 
large  revenue  from  this  source  is  assured  when  the 
purchase  of  the  main  lines  shall  have  been  com- 
pleted, which  will  take  place  in  about  fifty  years. 

Expenditure  falls  mainly  under  two  heads :  Military, 
£18,000,000,  and  Civil,  £26,000,000.  The  military 
charges  are  not  high  when  the  extent  of  the  country 
and  the  enormous  population  are  considered,  while 
civil  expenditure  includes  outlay  upon  an  unusually 
large  number  of  government  activities. 

The  progress  of  India  has  been  very  great  during 
the  last  forty  years,  and  the  burden  of  taxation  upon 
the  Indian  community  is  probably  lighter  than  that 
under  any  other  civilised  government ;  the  average 
taxation  amounts  to  only  is.  lod.  per  person,  while  the 
land-revenue  amounts  to  an  additional  is.  /d.  per  head. 

The  revenue  from  salt,  opium,  customs,  tributes, 
railways,  etc.,  are  devoted  to  imperial  taxation.  The 
revenue  from  land,  stamps,  excise,  assessed  taxes,  etc., 
is  shared  between  the  imperial  and  the  provincial 
governments. 

•  The  Land  is  the  largest  source  of  revenue  in  India, 
yielding  a  land-tax  or  rent -charge  of  £18,500,000. 
This  sum  is,  however,  not  really  taxation  at  all,  but 
represents  the  rent  of  the  soil  paid  by  the  cultivators 
to  the  State,  which  has  always  been  the  recognised 

144 


VIIL]          THE   INDIAN   REVENUE   SYSTEM 

owner  of  the  soil,  and  is  the  immediate  landlord 
over  the  major  part  of  the  country.  This  revenue  has 
increased  in  gross  amount,  mainly  through  an  increase 
in  the  territory  under  British  rule,  and  through  additions 
to  the  area  under  cultivation,  either  by  reclamation  of 
waste  or  by  the  extension  of  irrigation  in  more  or  less 
desert  tracts  at  the  expense  of  the  government.  This 
increase  has  been  coincident  with  a  general  reduction  in 
the  assessments.  The  State  thus  receives  in  rent  from 
8  to  10  per  cent,  of  the  gross  produce  of  the  soil.  In 
addition  to  the  rent  there  are  local  assessments  of  the 
land  for  the  maintenance  of  roads,  schools,  hospitals, 
etc.  Municipal  revenue  is  derived  mainly  from  octroi 
and  taxes  on  land,  houses,  vehicles,  and  animals. 

Forestry,  which  is  carried  on  in  a  very  efficient 
manner  by  the  government  in  India,  has  secured 
to  the  country  more  than  240,000  square  miles  of 
valuable  property.  This  State  enterprise  supplies  a 
necessary  commodity  of  which  the  country  was  rapidly 
becoming  denuded  by  reckless  consumption,  while  it 
employs  much  labour.  Forests  yielded  a  net  revenue 
of  £1,477,000  in  the  year  1903-4. 

Opium  is  a  government  monopoly ;  it  may  be 
grown  only  in  three  provinces,  and  in  the  native 
states  of  Central  India.  A  duty  and  a  licence  are 
required  for  the  sale  of  the  drug,  and  a  licence 
is  also  required  for  poppy  cultivation.  The  produce 
of  the  British  provinces  is  purchased  by  government 
agents  at  fixed  prices,  the  opium  is  manufactured  in 
government  factories,  and  sold  by  auction  at  Calcutta. 
The  Malwa  opium  of  Central  India  pays  a  pass  duty 
on  entering  British  territory.  The  net  revenue  in 
1903-4  was  £3,506,000.  This  is  contributed  principally 

145  T 


SOME   OTHER   REVENUE   SYSTEMS      [CHAP. 

by  the  Chinese  richer  classes,  who  are  the  chief  con- 
sumers of  Indian  opium,  which  is  superior  to  Chinese 
opium,  and  is  also  more  expensive.  The  gross 
value  of  the  poppy  crop  is  estimated  at  £12,000,000; 
the  industry,  together  with  the  manufacture  and  dis- 
tribution of  the  opium,  employs  many  cultivators  and 
yields  a  large  profit  to  the  merchants,  shippers,  and 
others  engaged  in  the  various  processes. 

The  Income-tax  yielded  in  1903-4  a  net  sum  of 
£1,207,000.  This  tax  has  recently  been  revised,  and 
the  minimum  income  now  paying  the  tax  is  Rs.iooo; 
under  Rs.2OOO  the  rate  is  2  per  cent. ;  on  Rs.2ooo 
and  upwards  it  is  2\  per  cent.  It  amounts  to  about 
5d.  in  the  £  on  the  lower  scale,  and  6£d.  on  the  higher. 
The  tax  touches  only  some  240,000  persons :  these  are 
the  large  landowners,  merchants,  official  and  professional 
classes. 

The  Salt-tax  is  practically  the  only  tax,  with  the 
exception  of  a  small  duty  on  cotton  goods,  which  falls 
on  the  mass  of  the  people.  It  yielded  in  1903-4  the 
net  revenue  of  £4,982,000.  Salt  is  obtained  partly 
by  importation  and  partly  by  local  production  (salt- 
mines and  evaporation) ;  the  customs  or  excise  duty 
levied  during  1903-4  was  at  Rs.2  per  maund  (82  Ibs.), 
which,  at  the  average  annual  rate  of  consumption, 
amounts  to  about  4d.  per  person.1  The  duty  is  R.I 
per  maund  in  Burma.  The  tax,  though  apparently 
a  high  percentage  on  the  value  of  the  article,  is  not 
really  onerous,  and  it  would  be  difficult  to  devise  any 
other  duty  of  general  incidence  less  oppressive  and  less 
open  to  evasion. 

Stamp  Duties  give   a   revenue   of  £3,538,000.     This 

1  This  duty  was  reduced  in  March  1905  to  Rs.i£  per  maund. 

146 


viii.]          THE   INDIAN   REVENUE   SYSTEM 

tax  falls  upon  only  a  limited  portion  of  the  community  ; 
about  two-thirds  represents  fees  for  the  services  of 
the  law  courts  to  individuals,  the  remainder  is  a  stamp 
charge  on  commercial  transactions  involving  pecuniary 
payments. 

Excise  Duties,  derived  mainly  from  intoxicating  liquors 
and  drugs,  yielded  ^4,933,000.  Intemperance  is  rare 
among  Indians,  and  many  are  total  abstainers  on 
religious  grounds.  Tobacco  pays  no  excise  duty, 
being  a  common  product  grown  widely. 

Customs  Duties  give  a  net  revenue  of  .£3,838,000. 
This  is  derived  chiefly  from  cotton  goods,  silver, 
petroleum,  liquors,  and  sugar.  Since  1894  there  has 
been  a  general  tariff  which  affects  a  very  large 
number  of  articles,  the  majority  of  which  yield  but 
little  revenue.  Formerly  import  duties  were  levied  not 
only  on  many  articles  but  also  at  higher  rates  than 
at  present  ;  reform  on  free-trade  lines  set  in  about 
1876  and  continued  until  1882,  when  the  only  duties 
remaining  were  those  on  salt,  liquors,  arms,  and 
ammunition ;  to  these  was  added  later  a  duty  on 
petroleum  (mainly  obtained  from  Russia  and  the 
United  States).  Export  duties  were  formerly  numer- 
ous ;  only  that  upon  exported  rice  now  remains. 
The  rice  is  grown  mostly  in  Burma ;  the  duty  is 
4d.  per  cwt.  and  the  tax  yields  a  revenue  of  ^600,000. 

Between  1882  and  1894  India  was  as  nearly  as 
possible  a  free -trading  country.  In  1894,  in  con- 
sequence of  difficulties  connected  with  the  fall  in 
the  value  of  the  rupee,  it  became  necessary  to  enlarge 
the  sources  of  revenue,  and  the  imposition  of  a 
general  5  per  cent,  import  duty  for  revenue  purposes 
was  ultimately  adopted.  These  duties  were  imposed 

-  147 


SOME   OTHER   REVENUE   SYSTEMS      [CHAP. 

with  a  view  to  revenue,  and  were  not  intended  to  be 
protective,  for  an  equivalent  excise  duty  was  levied 
upon  cotton  goods,  the  only  important  native  com- 
peting commodities.  The  duty  on  cotton  manufactures 
(both  customs  and  excise)  was  soon  afterwards  reduced 
to  3^  per  cent,  ad  valorem.  The  import  duty  on  iron 
and  steel  is  only  I  per  cent.,  and  machinery  is  mostly 
admitted  free. 

The  Post  Office,  which  is  exceedingly  efficient,  earned 
£1,507,000  and  cost  £1,403,000,  showing  a  net  revenue 
of  £104,000.  Owing  to  a  reduction  in  rates,  telegraphs 
in  1903-4  were  not  a  source  of  revenue,  the  charges 
exceeding  the  receipts  by  £59,000.  These  services 
normally  impose  no  burden  upon  India,  and  yield  little 
revenue.  A  small  revenue  in  the  form  of  receipts  for 
registration  of  documents  amounts  to  £3  26,000,  which 
is  an  equivalent  for  service  rendered,  and  falls  on  a 
limited  class. 

The  Railways  of  India  extend  over  27,750  miles  ; 
they  are  nearly  all  the  property  of  the  government,  and 
have  been  created  by  British  capital.  Until  the  year 
1899  their  earnings  did  not  cover  expenses  ;  they  now, 
however,  yield  a  net  revenue  which  amounted  in 
1903-4  to  £861,000,  after  paying  working  expenses, 
interest  on  capital,  and  contribution  to  redemption 
fund.  The  investments  in  railways  represent  a  capital 
outlay  of  £237,575,000. 

Irrigation. — The  State  has  expended  large  sums  on 
irrigation  works  which  have  reclaimed  some  21,000,000 
acres  of  land  for  cultivation,  thus  finding  subsistence 
and  employment  for  many  millions  of  peasants.  The 
net  revenue  from  irrigation  amounted  in  1903-4  to 
7-6  per  cent,  on  the  capital.  It  is  estimated  that 

148 


viii.]  INDIAN   FINANCE 

the   value   of  the   crops   raised  annually  on  this  land 
represents  88  per  cent,  on  the  capital  outlay. 

The  Debt  of  India  in  March  1905  amounted  to 
£2 1 4,4 1 6,000,  and  other  government  obligations  (Savings 
Bank,  Service  funds,  etc.)  to  £17,206,000.  Of  this  sum 
the  government  has  expended  £87,928,000  in  the  con- 
struction of  railways,  and  £26,108,000  on  irrigation 
works,  all  of  which  have  increased  development  so  as 
to  become  remunerative  and  beneficial,  and  a  permanent 
source  of  revenue.  In  addition,  government  purchased 
by  cash  or  annuities  six  railways  on  which  £85,219,000 
had  been  spent  by  companies.  Loans  to  native  states, 
port  trusts,  corporations,  cultivators,  and  others  amount 
to  £12,041,000,  and  advances  to  railways  to  £11,363,000. 
The  gold  reserve  fund  in  England  and  the  cash  balances 
amounted  to  £29,034,000.  These  various  investments 
more  than  balance  the  whole  debt,  and  cover  by  their 
return  the  interest  thereon.  There  is  no  unfunded  debt. 
Contrasted  with  the  large  war  debts  of  European 
countries,  and  also  with  the  enormous  war  and  adminis- 
trative expenditure  of  those  countries,  the  finances 
of  India  must  be  held  to  be  in  a  very  satisfactory 
condition. 

Taking  into  consideration  the  peculiar  circumstances 
of  India,  the  history  and  character  of  its  various 
peoples,  and  their  diverse  ideals  and  modes  of  life,  the 
existing  fiscal  system  seems  to  be  fully  justified  by 
results.  Under  conditions  very  different  from  those 
of  Great  Britain  the  canons  of  Adam  Smith  are 
satisfied ;  economy  and  productiveness  are  secured, 
while  the  burden  is  adjusted  to  capacity  to  pay  in  a 
manner  which  appears  to  conform  to  the  canon  of 
justice. 

149 


SOME   OTHER   REVENUE   SYSTEMS      [CHAP. 

The  exports  of  merchandise  from  India  for  the  year 
1904-5  amounted  to  ^105,138,000,  and  the  imports  to 
£69,608,000,  while  the  exports  and  imports  of  treasure 
were  £10,953,000  and  £26,338,000  respectively.  The 
balance  against  India  is  explained  by  the  payments  to 
Great  Britain  for  the  expenses  of  government,  the 
interest  earned  by  British  capital  invested  in  Indian 
railways,  and  in  various  industries,  such  as  tea,  indigo, 
cotton,  jute,  etc. ;  other  items  are  profits  of  merchants, 
shipowners,  and  bankers,  and  remittances  of  Civil 
servants  to  Great  Britain. 

Of  the  imports  about  two  -  thirds  are  obtained 
from  the  United  Kingdom,  about  10  per  cent,  from 
British  possessions,  and  the  remainder  from  other 
countries. 

The  exports  consist  of  (i)  Raw  materials  (cotton, 
jute,  skins  and  hides,  dye  stuffs,  silk,  etc.)  £39,365,000 ; 

(2)  Food  stuffs  (tea,  coffee,  wheat,  rice,  etc.),  £23,930,000  ; 

(3)  Manufactured  goods  (cotton,  twist,  and  yarn,  cotton 
piece  goods  and  jute  goods),  £14,594,000 ;   (4)   Other 
articles,  ^6,031,000. 

About  one-half  of  these  exports  find  a  free  market ; 
the  remainder  are  subject  to  duties  in  the  country  of 
import,  which,  like  the  tea  duty  in  the  United  Kingdom, 
are  for  revenue,  or  form  part  of  the  protective  tariff 
scheme  in  other  countries.  No  system  of  tariff  prefer- 
ence could  benefit  Indian  trade ;  wheat  is  not  capable 
of  much  stimulation,  and  only  tobacco  and  indigo 
could  gain  by  any  favour.  The  views  of  the  Indian 
Government  on  the  subject  of  preferential  tariffs  within 
the  Empire  are  thus  summarised  :l 

"  Firstly,  that  without  any  such  system,  India  already 

1  Government  Bluebook  (cd.  1931). 
150 


viii.]  FRENCH   FINANCE 

enjoys  a  large,  probably  an  exceptionally  large,  measure 
of  the  advantages  of  the  free  exchange  of  imports  and 
exports. 

"  Secondly,  that  if  the  matter  is  regarded  exclusively 
from  an  economic  standpoint,  India  has  something,  but 
not  perhaps  very  much,  to  offer  to  the  Empire ;  that 
she  has  very  little  to  gain  in  return ;  and  that  she  has 
a  great  deal  to  lose  or  to  risk. 

"  Thirdly,  that  in  a  financial  aspect,  the  danger  to 
India  of  reprisals  by  foreign  nations,  even  if  eventually 
unsuccessful,  is  so  serious  and  their  results  would  be  so 
disastrous,  that  we  should  not  be  justified  in  embarking 
on  any  new  policy  of  the  kind  unless  assured  of  benefits 
greater  and  more  certain  than  any  which  have,  so  far, 
presented  themselves  to  our  mind." 


FRANCE 

France  affords  a  comparison  with  the  fiscal  system 
of  a  progressive  country,  resembling  Great  Britain  very 
closely  in  many  respects  and  yet  differing  in  some 
material  conditions.  The  population  of  France  numbers 
nearly  40,000,000 ;  its  area  covers  207,000  sq.  miles ; 
the  country  is  more  agricultural  than  Great  Britain,  and 
is  almost  self-sufficing  as  regards  food-necessaries ;  its 
mineral  resources  are  not  great,  and  its  manufacturing 
industries  are  smaller  than  those  of  Great  Britain.  It 
has  not  as  large  an  extent  of  coastline  as  its  insular 
neighbour,  though  it  possesses  an  adequate  supply  of 
good  harbours  and  ports  for  foreign  commerce,  and  it 
is  also  in  closer  relation  with  continental  Europe. 

The  expenditure  of  France,  estimated  at  ;£  145,000,000 


SOME   OTHER   REVENUE   SYSTEMS      [CHAP. 

for  the  year  1905,  differs  only  slightly  in  amount  from 
that  of  the  United  Kingdom.  It  is  classified  under 
five  heads : 

1.  Expense  of  Public  Debt,  £48,060,823.     This  amount 
includes  interest  and   charges   on   the  enormous   debt 
of  £1,235,370,969,  and  also  £10,589,947  for   pensions, 
military,  naval,   and   civil,   which    count   as    a    public 
debt  liability  and  are  continually  increasing ;  it  must 
be  noted  that  some  £300,000,000  of  the  debt  has  been 
incurred  in  advances  to  French  railways,  and  represents 
an    investment    in   what   will    be   ultimately   a    State 
property. 

2.  Expenses     of    Executive     Government      (Pouvoirs 
Publics),  £547,780.     This  sum  is  in  effect  the  French 
Civil  List ;  it  comprises  the  salary  of  the  President  and 
also  administrative  expenses,  including  the  salaries  of 
the  Senate  and  Chamber  of  Deputies. 

3.  Expenditure  of  State  Departments,  £75,206,266.    Of 
this  sum  the  War  Department  counts  for  £27,393,380 ; 
Marine     Department,     £12,747,930;     Public     Instruc- 
tion,   £9,480,5,92;    Colonies,   £4,431,173;    Agriculture, 
£1,228,784.     It  may   be   noted   that  the   Colonies  are 
a   source  of  expense,  of  which  the  chief  item   is   for 
military    defence.        The   expenditure   on    agriculture 
covers  subventions  to  agricultural  societies,  bounties  for 
the  cultivation  of  silkworms,  flax,  and  hemp,  expenditure 
on   stud-farms   and   horse-breeding.     The    Ministry   of 
Commerce  also  gives  bounties  to  merchant-shipbuilding 
and  navigation,  fisheries,  and  the  silk   industry,  which 
together  amount  to  £1,634,000.     The  Ministry  of  Public 
Works  expended  £9,192,764,  of  which  £1,784,000  con- 
sisted  of  guarantees   and    subventions   to   railways  in 
France,  Algiers,  and  Tunis. 

152 


VIIL]         THE   FRENCH   REVENUE   SYSTEM 

4.  Administration    of  Monopolies   and  Collection   of 
Taxes,  £1 8,636,440. — Under  this  head  the  Post  Office 
accounts   for   £9,497,280,  and   the   collection   of  taxes 
costs  £4,907,378,  while  the  management  of  the  State 
industries   (tobacco,    matches,    and   gunpowder)    costs 
£3,675,382. 

5.  Reimbursements  (drawbacks,  etc.),  £1,670,842. 

The  French  State  Revenue  (£144,923,000  for  the 
year  1905)  is  derived  from  a  variety  of  sources,  of  which 
the  following  are  the  principal  elements : — 

i.  Direct  Taxes. — These  consist  of  (i.)  a  land-tax 
(Impot  fonder},  which  is  a  tax  upon  rent,  (ii.)  a  tax  on 
buildings,  (iii.)  a  tax  on  personalty  (personelle  mobiliere\ 
(iv.)  a  tax  on  doors  and  windows,  (v.)  Licences  to  follow 
occupations  and  professions  (patentes} ;  this  is  really 
a  tax  on  trade-profits  from  which  farming  is  exempt, 
while  other  occupations  are  classified  according  to  a 
complicated  scheme.  The  whole  group  constitutes 
a  tax  on  earnings,  profits,  and  rent,  and  forms  a 
species  of  property  and  income-tax  which  contributes 
£20,063,543,  or  14  per  cent,  of  the  whole  revenue. 
It  has  been  proposed  on  several  occasions  to  substitute 
an  income-tax  for  the  taxes  on  land,  personalty,  and 
doors  and  windows.  On  a  recent  occasion  (1904)  the 
Minister  of  Finance,  M.  Rouvier,  suggested  a  progressive 
tax  in  which  the  graduation  was  to  be  effected  (a) 
by  exemptions  according  to  the  population  of  the 
Commune,  commencing  with  a  minimum  exemption 
of  £30  for  communes  with  less  than  2000  inhabitants, 
and  rising  to  a  maximum  exemption  of  £100  in  Paris ; 
(b)  by  classifying  incomes  in  categories  (more  than 
forty  groups),  so  as  to  take  3  per  cent,  of  the 

153  U 


SOME   OTHER   REVENUE   SYSTEMS      [CHAP. 

average  income  in  each  category.  The  proposal  was, 
however,  rejected,  on  account  of  the  necessarily 
inquisitorial  character  of  the  scheme,  and  also  on 
other  grounds. 

2.  Sundry  taxes,  also  regarded  as  direct.     These  fall 
on    carriages,    horses,     cycles,     motors,     weights     and 
measures,  on   royalties   from    mines,   and    on  property 
in  mortmain;  they  yield  collectively  £i, 973,510. 

3.  Registration. — Under  this  head   are  taxes  on  acts 
or    operations    requiring    for    legality    some    form    of 
public  registration.     They  include  the  sale  of  property, 
gifts  inter  vivos,  successions,  mortgages,  civil,  adminis- 
trative,  and    judicial   processes ;   and   they   amount   to 
£23,851,620,  or  17  per  cent,  of  the  total  revenue.     The 
succession  duties  were  last   revised  in   1902,  and   now 
constitute  an  elaborate  scheme  in  which  the  progressive 
principle  is  adopted  and  is  applied  by  a  double  method 
(a)  according  to  the  degree  of  relationship,  classed  in 
seven  stages,  (b)  according  to  the  value  of  the  property, 
graded  in  twelve  classes.     The  scheme  resembles  that 
of  the  British  Death  duties,  and  appears  to  be  framed 
upon  the  model  of  the  British  Finance  Act  of  1894. 

4.  Stamps  yield  £7,560,428  ;  Stock  Exchange  transac- 
tions, £294,640 ;  and  taxes  on  incomes  from  securities 
other  than  rentes   £3,202,700.     This  group  corresponds 
in  principle  to  somewhat   similar  taxes  in  the  British 
system,  and  calls  for  no  special  comment. 

5.  Customs  yield  £17,885,680,  or  12  per  cent,  of  the 
whole.    This  branch  of  taxation  is  by  no  means  for  purely 
revenue  purposes,  the  tariff  has  also  a  protective  aim  ;  the 
duties  are  numerous  and  fall  upon  articles  of  food,  raw 
material,    and    manufactures,   many   of  them   yielding 
very  little  revenue,  while  some  restrict  the  development 


viii.]         THE   FRENCH   REVENUE   SYSTEM 

of  French  industry  by  excluding  materials  which  would 
be  useful.  The  real  revenue  is  derived  from  a  small 
number  of  non  -  protective  duties,  of  which  those  on 
coffee  and  petroleum  yield  the  largest  proportion.  Many 
duties  are  only  partially  protective.  The  system  has 
the  necessary  defects  of  all  attempts  to  shelter  home 
industry  by  a  tariff.  Compared  with  the  British  Customs 
the  French  Customs  are  less  elastic  in  character,  while 
they  are  subject  to  greater  fluctuations  from  accidental 
circumstances  of  supply  ;  they  are  also  less  economic  in 
collection,  and  the  duties  entail  indirect  loss  by  their 
interference  with  trade  and  industry.1 

6.  Internal  indirect  taxes  (excise).  This  is  a  group 
comprising  taxes  on  liquors  and  liquor  licences,  salt, 
oil,  and  railway  traffic,  which  yield  £23,468,392,  or 
17  per  cent,  of  the  whole  revenue.  The  taxes  on  con- 
sumables date  back  to  the  fifteenth  century ;  they 
were  increased  considerably  in  the  seventeenth  century, 
when  their  burden  became  very  oppressive  to  the 
poorer  classes  owing  to  the  system  of  tax-farming, 
the  exemption  of  the  higher  classes,  and  great  local 
inequalities.  Temporarily  abolished  at  the  Revolu- 
tion, these  indirect  taxes  were  restored  afterwards  on 
a  more  equitable  basis,  and  have  since  been  widely 
applied  to  commodities  both  for  State  and  local 
revenue.  In  the  year  1900  the  duties  on  drinks 

1  The  effect  of  this  protective  policy  is  illustrated  by  the  case  of 
wheat,  of  which  the  average  consumption  in  France  is  over  470  Ibs. 
per  head.  The  import  duty  (equal  to  125.  2^d.  per  quarter)  causes 
France  to  be  practically  self-sufficing  as  regards  wheat,  except  in 
years  of  bad  harvests.  Over  a  period  of  twelve  years  the  amount 
imported  varied  from  2  to  25  per  cent,  of  the  whole  supply.  But 
the  price  was  405.  8£d.  per  quarter  in  France  against  275.  6d.  in 
England  (see  Blue  Book  (cd.  1761),  page  124). 

'55 


SOME   OTHER   REVENUE   SYSTEMS      [CHAP. 

were  remodelled  with  the  object  of  reducing  the 
taxes  on  hygienic  drinks  (cider,  beer,  and  wine),  and 
of  increasing  the  tax  upon  alcohol  (spirits) ;  the  result 
is  that  out  of  £18,000,000  now  derived  from  drinks 
nearly  £15,000,000  are  obtained  from  the  sale  of 
alcohol  and  from  licences  for  its  sale.  In  addition 
to  the  national  revenue  from  alcohol,  more  than 
£6,000,000  is  raised  on  drinks  by  the  communal 
octroi  for  local  and  municipal  purposes. 

The  tax  on  salt,  a  necessary,  realises  about  £500,000  ; 
this  tax  is  further  uneconomic  in  that  salt  could  be 
imported  more  cheaply  than  it  can  be  manufactured  in 
France . 

The  Railway  Duty  on  passengers  and  goods  is  heavy, 
and  produces  £2,638,248.  The  real  incidence  of  this 
duty  is  in  France  upon  passengers  and  trade,  since 
the  government  guarantees  the  payment  of  interest 
on  capital,  and  makes  subsidies  annually  for  that 
purpose.  The  great  railway  system  of  France  was 
developed  under  concessions  from  the  State ;  and  by 
a  convention  of  1883  these  railways  will  become  State 
property  between  the  years  1950  and  1960.  Mean- 
while, the  State  has  contributed  about  25  per  cent, 
of  the  expense  of  construction,  and  annually  makes 
advances  towards  the  upkeep  of  the  railways  and  in 
aid  of  interest  on  the  shares ;  these  annuities  are 
contributions  which  go  towards  capital-cost  and  the 
ultimate  acquisition  by  the  State  when  the  concessions 
expire.  In  1904  the  gross  expenditure  on  railways 
by  the  State  was  about  £11,000,000. 

7.  The  Sugar  Duty  realised  £5,795,000  in  1905. 
Sugar  is  at  present  in  a  peculiar  and  unsettled  con- 
dition. Prior  to  the  Brussels  convention  of  1902  the 

156 


viii.]         THE    FRENCH   REVENUE   SYSTEM 

production  of  sugar  was  stimulated  artificially  by  a 
bounty.  The  total  production  of  France  and  her 
colonies  was  about  1,100,000  French  tons  per  year;  of 
this,  430,000  tons  were  consumed  in  France,  the 
remainder  was  exported  with  a  bounty.  The  aboli- 
tion of  the  bounty  and  the  reduction  in  1903  of  the 
excise  duty  on  home-consumption  from  483.  to  2os.  per 
100  kilograms  diminished  exports,  increased  the  con- 
sumption in  France,  and  stimulated  manufactures  in 
which  sugar  forms  an  ingredient.  The  result  is 
complicated  and,  as  yet,  not  clearly  ascertainable ;  but 
it  must  be  a  net  economic  gain  to  France  on  the 
whole  when  normal  conditions  shall  have  been  attained. 
The  reduction  of  £560,000  in  the  yield  of  the  tax 
has  to  be  set  against  the  various  advantages  from  the 
saving  of  the  bounty,  from  the  cheapening  and  increased 
consumption  of  sugar,  and  from  the  indirect  stimulus  to 
sundry  industries.  .> 

8.  State  monopolies  and  services  yield  £32,583,932. 
Post  Office,  telegraphs,  and  telephones  contribute  to 
the  government  £12,462,760  gross.  But  the  interest- 
ing element  in  this  group,  to  which  there  is  nothing 
corresponding  in  the  British  system,  is  the  revenue 
from  industries  conducted  by  the  State  as  national 
monopolies ;  the  most  important  of  these  is  tobacco, 
which  yields  £17,440,000;  matches  and  gunpowder 
together  produce  nearly  £2,000,000.  This  revenue  is 
derived  mainly  from  the  artificial  monopoly-price  of 
the  articles  and  not  from  ordinary  profits ;  it  is  there- 
fore a  tax  levied  in  a  peculiar  manner.  The  economic 
objections  to  State  production  have  been  discussed 
in  a  previous  chapter.  Perhaps  tobacco  is  less  open 
to  these  objections  than  manufactures  of  necessaries, 


SOME   OTHER   REVENUE   SYSTEMS  [CHAP.  vm. 

still  certain  disadvantages  are  inevitable  in  the  sup- 
pression of  competition,  and  these  are  not  eliminated 
by  the  fact  that  the  object  is  taxation.  The  system  is, 
however,  a  long-established  form  of  taxation  in  France, 
and  one  that  will  be  changed  with  great  difficulty. 

9.  State  Domains  yield  a  little  over  ^"2,000,000.  The 
chief  contributions  are  from  forests  and  rents ;  the 
expense  of  management  amounts  to  ^553,800.  Sundry 
other  State  properties,  leased  or  sold,  and  unclaimed 
legacies  make  up  the  remainder. 

For  purposes  of  local  government  France  is  divided 
into  36,192  communes  of  different  areas,  in  which  the 
population  varies  very  considerably.  In  many  of  these, 
including  all  the  large  towns,  the  recognised  method 
of  raising  revenue  is  by  the  octroi  or  "ingate  tolls," 
which  place  duties  upon  consumables  entering  towns. 
These  duties  are  largely  upon  drinks,  and  especially 
alcoholic  drinks ;  but  they  also  fall  upon  food,  fuel, 
fodder,  and  materials  of  industry.  The  system  and  its 
economic  effects  are  described  in  the  chapter  on  Local 
Taxation.  The  other  chief  source  of  local  revenue 
consists  of  a  share  of  the  direct  taxation  upon  land 
and  personalty,  upon  trade  licences,  doors  and  windows, 
carriages  and  horses,  cycles,  etc.  These  taxes,  under 
the  name  of  "  additional  centimes,"  are  levied  along  with 
the  State  taxes,  and  are  apportioned  to  the  departments 
and  communes  in  accordance  with  their  special  needs. 

This  brief  account  of  the  French  fiscal  system  suffices 
to  bring  out  the  chief  points  of  contrast  with  the  British 
system,  and  affords  a  comparison  of  their  respective 
merits,  while  it  illustrates  the  principle  that  different 
circumstances  —  historical  and  political  —  give  rise  to 
differences  in  methods  of  taxation. 

158 


CHAPTER   IX 

LOCAL    TAXATION 

THE  subject  of  local  taxation  is  one  of  great  com- 
plexity ;  there  are  wide  differences  of  opinion  both  as 
to  what  are  the  most  equitable  and  productive  methods 
of  raising  revenue  for  local  purposes,  and  also  as  to  the 
real  incidence  of  rates  under  the  existing  system. 

Taxes  for  local  purposes  are  called  rates  from  the 
mode  of  their  assessment ;  they  are  levied  upon  the 
occupiers  of  immovable  property  (land,  houses,  and 
trade  premises)  on  the  basis  of  the  net  rent  valuation  ; 
they  are  raised  by  the  local  authorities  in  limited 
areas,  which  vary  considerably  in  extent,  and  even 
more  in  the  value  of  the  ratable  property  they  con- 
tain. Hence  rates  differ  in  different  localities.  In  the 
case  of  imperial  taxation  of  commodities  a  duty  is 
imposed  upon  each  unit  of  consumption.  Local  taxa- 
tion reverses  this  process ;  it  starts  with  the  gross 
amount  required ;  the  ratio  of  the  assessed  value  of 
rateable  property  in  the  district  to  this  sum  gives  the 
rate  per  £  to  be  levied,  and  each  occupier  pays  at 
this  rate  on  the  assessed  value  of  his  holding. 

Rates,  like  imperial  taxes,  are  compulsory  contribu- 
tions for  the  common  service ;  but  local  taxation  differs 
from  national  taxation  in  that  it  is  devoted  to  a 

159 


LOCAL  TAXATION  [CHAP. 

limited  area,  and  is  more  distinctly  "  beneficial,"  that 
is,  more  obviously  productive  in  its  aim  as  providing 
conveniences  —  roads,  sanitation,  lighting,  parks,  town- 
halls,  etc.,  for  a  special  locality ;  it  appeals  more  directly 
to  the  quid  pro  quo  principle  than  national  taxation, 
as  offering  to  the  ratepayer  a  visible  equivalent  in 
service  for  the  sacrifice  involved.  Some  portion,  how- 
ever, of  the  revenue  of  every  district  is  devoted  to  the 
performance  of  services  which  partake  of  a  national 
character,  and  confer  a  more  general  public  utility,  such 
as  the  provision  of  police,  education,  and  poor  relief. 
The  State  determines  and  dictates  these  public  duties, 
and  sometimes  also  the  standard  of  efficiency  to  be 
maintained  ;  for  the  purpose  of  economic  administra- 
tion they  are  carried  out  locally,  but  under  the 
supervision  of  the  central  government,  which  under- 
takes to  defray  part  of  the  cost  by  subsidies  from 
imperial  taxation,  since  the  services  conferred  by  the 
outlay  are  not  exclusively  local,  but  yield  a  national 
benefit. 

The  principle  of  rating  dates  definitely  from  the 
Poor  Law  of  1601,  which  adopted  the  parish  as 
the  local  unit,  since  it  was  already  the  authority 
for  the  provision  of  highways.  With  the  modern 
growth  of  State  and  municipal  activity  new  duties 
have  been  imposed,  and  extended  powers  of  rating 
conferred  upon  the  local  authorities,  so  that  the  system 
has  developed  greatly  during  the  last  fifty  years,  and 
more  particularly  in  urban  districts  where  population 
has  increased  rapidly  and  improvements  are  con- 
tinuous. 

The  local  expenditure  of  England  and  Wales  for  the 
year  1902-3  amounted  to  £12 8,968,000;  of  the  sum  so 

1 60 


ix.]  THE    RATING   PRINCIPLE 

expended,  ,£50,328,000  or  39  per  cent,  was  raised  by 
rates,  £4,450,000  from  tolls  and  dues,  .£35,271,000  from 
loans,  and  ;£i  2,782,000  was  contributed  by  the  State 
from  imperial  taxation,  while  £22,300,000  was  derived 
from  remunerative  enterprises,  such  as  gas  and  water 
works,  tramways,  electric  lighting,  and  from  rents  of 
corporate  property.  Local  taxation  grows  rapidly. 
The  total  local  expenditure  of  England  and  Wales 
in  1882-3  amounted  to  £53,420,000,  and  rates  were 
.£24,470,000 ;  thus  in  twenty  years  the  local  expendi- 
ture increased  141  per  cent.,  and  rates  116  per  cent, 
meanwhile  the  rate  per  £  on  ratable  rental  has  risen 
from  33.  3|d.  to  53.  7^d. 

The  original  idea  underlying  the  rating  principle 
was  doubtless  to  secure  that  the  inhabitants  of  a 
locality  should  contribute  to  the  support  of  the  poor 
and  other  local  expenditure  in  proportion  to  their 
ability  or  means ;  this  was  thought  to  be  indicated  by 
their  durable  possessions,  houses,  and  land,  and  in  those 
simpler  times  both  the  principle  and  its  test  were 
fairly  equitable.  But  "ability,"  the  primary  canon  of 
national  taxation,  to  which  the  quid  pro  quo  theory 
is  not  applicable,  is  very  difficult  of  satisfaction,  and 
cannot,  even  in  a  national  system,  be  measured  by  an 
income-tax  only.  Still  less  is  the  canon  of  "ability" 
the  proper  test  for  local  taxation  where  a  large  part 
of  the  outlay  is  directly  "  beneficial "  to  the  residents, 
or  owners,  and  where  fresh  rates  are  continually 
being  demanded  to  provide  some  new  improvement  or 
convenience. 

An  income-tax  has  been  suggested  as.  the  means 
of  providing  for  local  expenditure,  but  a  local  income- 
tax  in  the  modern  circumstances  of  a  highly  developed 

161  x 


LOCAL   TAXATION  [CHAP. 

country  is  not  the  most  suitable  method  of  payment 
for    the    special    advantages    of    local    improvements.1 
Incomes    do    not    necessarily    measure    the    benefits 
which   are   conferred   by  local    expenditure ;    they  are 
frequently   derived    from    various   and    distant    sources 
wholly  unconnected  with  the  locality :   and,  further,  it 
would  be  extremely  difficult  to  exact  an    income-tax 
from    the   majority   of   the   weekly- wage    classes,   who 
constitute   a   large   proportion    of    the    inhabitants    of 
many   districts   and   daily   share   in   the   benefits   con- 
ferred by  local  expenditure.     It  is  expedient,  therefore, 
in  seeking  a  basis  for  local  taxation   to   consider   the 
nature   of  the  outlay  and  its  results,  and  to  discover 
those  who  enjoy  the  benefits  of  the  expenditure,  since 
it  has  for  the  most  part  a  definite  local  reference,  and 
the  amount  is  also  largely  determined  by  the  will  of 
the  residents  themselves. 

On  the  Continent  a  local  customs  duty  or  octroi  is  a 
common  source  of  local  revenue ;  but  customs  and 
excise  duties,  though  excellent  modes  of  raising  some 
part  of  the  national  revenue,  are  very  unsuitable  for 
small  areas ;  they  are  costly  and  inconvenient  in 
collection,  and  inequitable  in  their  incidence,  since 
they  usually  fall  with  severity  on  the  poor  consumers 
of  necessaries,  and  they  obstruct  trade. 

Since  the  primary  aim  of  local  expenditure  is  local 
advantage,  and  a  large  part  of  the  rates  is  expended  upon 
services  which  give  back  a  definite  equivalent,  such  as 

1  The  income-tax  is  employed  for  purposes  of  local  taxation  in 
some  foreign  countries  and  British  colonies.  In  Prussia  and 
Holland  the  local  income-tax  runs  concurrently  with  an  income- 
tax  for  State  purposes  ;  in  Ontario  and  Massachusetts  it  is  employed 
only  for  local  purposes. 

162 


ix.]  BENEFICIAL   TAXATION 

the  outlay  on  drainage,  street-cleansing,  lighting,  water, 
parks,  etc.,  the  cost  should  fall  upon  those  who  are  the 
recipients  of  the  benefits.  First  among  these  are  the 
dwellers  in  the  locality,  who  occupy  houses  and  business 
premises,  etc.  House-rent  is  thus  suggested  as  a  basis 
for  assessment ;  the  house,  as  a  significant  mode  of 
expenditure,  does  form  a  rough  criterion  of  the  degree 
in  which  local  advantages  are  shared,  although  it  does 
not  form  an  equally  sound  test  of  "  ability "  to  con- 
tribute to  national  expenditure.  It  was  for  these 
reasons  that  Lord  Goschen  attempted  in  1871,  though 
unsuccessfully,  to  hand  over  the  House  Duty  to  local 
taxation. 

But  owners  of  land,  which  is  the  most  durable  localised 
form  of  property,  probably  derive  the  largest  permanent 
advantage  from  local  expenditure.  By  local  improve- 
ment their  property  is  increased  in  value ;  population 
grows,  rents  rise,  business  premises  are  extended, 
demand  for  land  increases  and  ground  -  rents  are 
permanently  enhanced  in  value.  Owners  of  property, 
therefore,  as  large  beneficiaries  from  local  public 
enterprise  and  expenditure,  should  contribute  to  local 
taxation,  and  as  nearly  as  possible  in  proportion  to 
the  advantages  they  derive  therefrom. 

Again,  manufacturers,  traders,  shopkeepers,  and 
farmers  all  benefit  by  improved  roads,  thoroughfares, 
drainage,  and  other  measures  which  render  their 
markets  accessible ;  their  expenses  are  diminished 
and  their  business  increased,  and  for  these  advantages 
they  should  contribute  to  the  cost  of  local  develop- 
ments. 

Taxation  for  purposes  which  present  no  very  obvious 
advantage  to  the  payer  is  called  "  onerous " ;  the 

163 


LOCAL  TAXATION  [CHAP. 

benefits  derived  from  its  outlay  are  more  general, 
indirect  and  diffused ;  such  is  the  expenditure  on 
elementary  education,  poor  relief,  and  health  regula- 
tions. Enlightened  public  opinion,  acting  through 
Parliament,  enforces  such  expenditure  upon  the  com- 
munity and  insists  on  some  standard  of  efficiency 
in  its  performance.  The  localities  administer  the  law 
and  look  to  the  central  government  for  aid  towards 
an  expense  which  concerns  the  national  well-being. 
As  we  have  seen,  in  the  year  1902-3  the  State  con- 
tributed from  imperial  taxation  ^12,782,803  (a  sum 
equal  to  one-fourth  of  the  rates)  in  aid  of  local  taxa- 
tion in  England  and  Wales  for  these  purposes.1  This 
system  of  subventions  was  begun  in  1835  by  means  of 
Parliamentary  grants-in-aid  from  the  consolidated  fund, 
made  annually  for  certain  definite  purposes — at  first  for 
criminal  prosecutions  and  the  support  of  prisons,  and 
afterwards  extended  to  the  maintenance  of  police, 
poor-law  schools,  pauper  lunatics,  health  officers  and 
sanitary  inspection,  registration,  etc.  In  the  year  1888, 
when  these  grants  had  grown  up  to  a  considerable 
aggregate,  the  system  was  modified  ;  the  greater  number 
of  the  grants-in-aid  were  discontinued,  and  in  lieu  of 
them  certain  excise  licences  (which  amounted  to  a 
larger  sum)  were  assigned  to  local  authorities,  and 
additional  relief  was  granted  by  the  allocation  of 
half  the  probate  duty  (for  which  in  1896  estate  duty 
was  substituted).  To  these  were  added  in  1890  the 
yield  of  two  extra  excise  and  customs  duties — on 

1  Of  this  sum  .£8,238,362  was  paid  out  of  the  Local  Taxation 
Accounts  (from  estate  duty,  licences,  customs  and  excise), 
£4,364,903  consisted  of  grants  from  the  Board  of  Education,  and 
-£I79)538  came  from  other  government  grants. 

164 


ix.]      STATE  CONTRIBUTIONS  TO  TAXATION 

beer  at  3d.  a  barrel,  and  spirits  at  6d.  a  gallon.1  By 
the  Agricultural  Rates  Act  of  1896,  a  further  grant 
was  made  from  the  estate  duty  for  the  relief  of  local 
taxation  on  agricultural  land  ;  this  subvention  was  to 
equal  half  the  rate  in  certain  conditions,  and  it 
amounted  to  £1,509,037  for  the  United  Kingdom  in 
the  year  I9O2-3.2 

There  has  been  much  controversy  on  the  whole 
subject  of  national  contributions  in  relief  of  local  taxa- 
tion. On  the  one  hand,  it  is  held  to  be  a  dangerous 
principle  to  establish  a  system  by  which  great  claims 
can  be  made  by  local  authorities  on  the  public 
exchequer ;  it  is  maintained  that  there  can  be  no 
effective  control  by  Parliament  over  local  expenditure, 
nor  any  guarantee  of  economy  ;  that  subsidies  obtained 
with  no  sacrifice  are  apt  to  be  lavishly  expended,  and 
that  it  is  impossible  to  define  with  any  precision  the 
proper  subjects  of  such  relief,  or  logically  to  determine 
the  proportion  of  aid  which  should  be  given ;  nor  can 
the  amount  of  the  contributions  to  different  districts 
be  determined  on  any  equitable  principle.  On  the 

1  80  per  cent,   of  these   surtaxes   was    assigned   to    England, 
ii    per  cent,  to  Scotland,  and  9  per  cent,  to  Ireland,  being  the 
estimated    proportions   of   their  respective   contributions   to   the 
general   revenue   of  the   United   Kingdom.      The  licence  duties 
are  assigned  to  the  councils  in  whose  areas  they  are  collected. 
The  death  duty  and  the  beer  and  spirit  surtaxes  (after  certain 
deductions)  are  apportioned  to  the  councils  in  proportion  to  the 
amounts  of  their  former  grants-in-aid. 

2  Since  extent  of  area  is  not  regarded  as  a  measure  of  the  degree 
of  benefit  derived  from   local   sanitary  expenditure,   agricultural 
land,  railways,  and  canals,  all  of  which  occupy  exceptionally  large 
areas  of  land  for  their  business  purposes,  are  assessed  at  only 
one-fourth  of  their  valuation  for  the  General  District  Rate  (Public 
Healths  Act  1875). 

'65 


LOCAL   TAXATION  [CHAP. 

other  hand,  it  is  admitted  that  many  of  the  services 
performed  by  local  authorities  are  enforced  by 
Parliament  and  concern  the  general  public  welfare ; 
the  expenditure  they  entail  is  "  onerous,"  and  should 
therefore  be  in  some  way  met  by  imperial  assistance. 
The  grant  from  the  State  is  "  not  a  compassionate 
grant  to  the  rate-payers,  but  a  charge  which  should 
fall  on  all  tax-payers."  Opinion  is  also  divided  as  to 
the  method  of  national  contribution,  viz.,  whether  the 
grants  should  be  considered  and  approved  by  Parlia- 
ment annually,  or  whether  the  principle  of  assign- 
ing special  revenues  to  local  purposes  is  to  be 
preferred ;  the  proportion  that  State  contributions 
should  bear  to  local  contributions  is  also  a  matter 
of  contention.1 

The  powers  of  local  authorities  are  derived  from  the 
central  government,  which  determines  the  constitution 
of  the  authorities,  and  from  time  to  time  assigns  to  them 
fresh  duties  with  corresponding  powers  of  rating.  In 
many  general  Acts  Parliament  has  laid  down  definite 
regulations  for  the  exercise  of  their  functions ;  in 
other  cases  it  has  delegated  the  duty  of  constructing 
regulations  to  a  government  department.  Statutory 
limitations  in  some  cases  regulate  the  degree  of  rating 
for  special  purposes,  for  instance,  for  the  purpose  of 
public  libraries  and  higher  education.  Obvious  advan- 
tages follow  from  the  control  of  the  State  over  local 

1  The  minority  Report  of  the  Royal  Commission  on  Local  Taxa- 
tion recommended — "  That  to  '  onerous '  expenditure  on  services 
which,  though  locally  administered,  are,  in  the  main  national  in 
character,  but  to  such  expenditure  only,  the  State  should  contribute 
a  fixed  amount.  That  this  contribution  should  not,  in  the  total, 
exceed  one-half  of  the  expenditure  upon  national  services." 

1 66 


ix.]  GOVERNMENT  CONTROL  OF  TAXATION 

government  and  expenditure.  In  the  first  place,  in 
matters  of  great  national  importance  it  can  secure 
unity  of  idea  and  some  uniformity  in  administration, 
while  permitting  some  degree  of  elasticity  in  local 
methods  ;  it  can  also  insist  upon  a  uniform  system  of 
keeping  accounts,  by  which  means  local  budgets  can 
be  compared  and  national  statistics  can  be  compiled. 
Poor-law  administration  affords  an  excellent  illustration 
of  the  valuable  results  which  have  followed  from  central 
regulation. 

Again,  it  is  of  vital  importance  that  taxation  of 
any  kind  should  have  the  national  sanction.  The 
amount  of  discretion  to  be  allowed  to  local  authorities 
in  expenditure  and  rating  is  a  debatable  question,  but 
it  can  scarcely  be  doubted  that  it  is  expedient  that 
Parliament  should  retain  the  power  to  limit  local 
expenditure  in  order  to  prevent  the  extravagance  and 
waste  which  might  easily  arise  from  the  inexperience 
and  short-sightedness  of  local  bodies,  and  to  guard 
against  the  tendency  to  favour  special  interests  by 
enterprises  undertaken  at  the  public  cost.  For  similar 
reasons  it  is  desirable  that  Parliament  should  control 
the  borrowing  powers  of  local  authorities.  The  function 
of  supervising  the  issue  of  local  loans  has  for  the  most 
part  been  committed  to  the  Local  Government  Board, 
to  which  department  proposals  for  loans  must  be 
submitted  for  approval. 

Incidence  of  Local  Rates. — It  would  be  difficult  to  find  a 
more  vexed  and  intricate  question  of  applied  economics 
than  that  of  the  real  incidence  of  local  rates  and  the 
proper  remedies  for  the  inequalities  said  to  arise  there- 
from. In  the  payment  of  rates  three  chief  interests  are 
involved — those  of  the  landowner,  the  house-owner,  and 

167 


LOCAL  TAXATION  [CHAP. 

the  occupier,  and  besides  these  there  are  the  interests 
of  interim-owners  of  houses,  i.e.,  leaseholders,  and  the 
consumers  of  goods,  and  the  members  of  the  community 
generally.  The  primary  incidence  is  on  occupiers, 
except  in  the  case  of  small  tenements  let  for  short 
periods  at  low  rents,  where  the  landlord  as  a  com- 
pound householder  may  pay  the  rates  and  recover 
them  wholly  or  in  part  in  the  rent  But  the  problem 
of  ultimate  incidence  is  rendered  very  complex  and 
difficult  by  the  shifting  of  the  burden  of  rates.  This 
is  caused  by  various  circumstances — the  number  of 
intermediate  interests,  the  different  periods  of  leases 
and  sub-letting,  the  terms  of  contract  in  letting  (fines, 
repairs,  premiums,  etc.),  imperfect  competition  with  the 
retarding  effects  of  economic  friction  and  all  that  it 
implies,  the  influence  of  custom,  ignorance,  and  apathy  ; 
obstacles  created  by  goodwill,  the  difficulty  and  expense 
of  moving,  different  areas  of  rating,  and  the  inequality 
of  rates  and  conditions  in  those  areas.  Any  general 
theory  of  incidence  must  be  subject  to  qualification  in 
these  respects,  but  in  spite  of  these  disturbing  influences, 
some  of  which  are  apt  to  be  over-estimated,  rates  are 
distinctive  economic  phenomena ;  they  must,  therefore, 
in  their  general  tendencies  conform  to  economic  prin- 
ciples which  can  be  described ;  and  though  for  isolated 
cases  and  for  short  periods  these  principles  may 
appear  to  offer  an  inadequate  explanation,  yet  on  a 
wider  view  of  the  subject  they  afford  sound  guidance. 
In  the  long  run  minor  causes  more  or  less  neutralise 
each  other,  and  their  disturbing  effects  may  be 
eliminated  ;  it  is  the  economic  factors  always  present 
which  give  the  permanent  tendency,  and  these  must 
be  fully  recognised  in  any  theory  of  incidence. 

1 68 


ix.]  INCIDENCE   OF   RATES 

The   problem   of   incidence   presents   four   cases   for 
separate  investigation  : 

(i)  Agricultural  Land. — Here  the  rates  are  levied 
upon  the  occupying  farmer  to  whom  the  land  is  an 
instrument  of  production  ;  but  capital  in  the  farming 
industry  cannot  be  subjected  to  special  taxation,  since 
that  would  cause  it  to  seek  more  profitable  employ- 
ment, therefore  the  effect  of  rates  is  to  reduce  rents 
in  the  same  manner  as  tithes.  The  farmer  takes  rates 
into  account  in  deciding  what  he  can  afford  to  pay  as 
rent  after  allowing  the  normal  return  to  his  capital  and 
superintendence :  "  high  rates  make  low  rents "  is  a 
popular  saying  which  embodies  this  view.  Nor  can 
rates  on  agricultural  land  be  shifted  upon  food  con- 
sumers, since  the  area  of  competition  which  fixes  the 
price  of  the  product  includes  many  and  distant  markets  ; 
agricultural  rates,  therefore,  come  for  the  most  part 
from  rent.  In  the  actual  working  out  of  this  principle, 
however,  there  are  modifications  :  e.g.,  if  rates  rise  or 
fall  during  the  period  of  an  agreement  the  loss  or 
advantage  will  accrue  to  the  farmer  until  readjust- 
ment takes  place  at  the  renewal  of  the  lease.  Again, 
farms  include  dwelling-houses  and  other  premises,  and 
agricultural  rates,  so  far  as  they  refer  to  farm-houses, 
will  follow  the  rule  for  ordinary  dwelling-houses  and 
fall  upon  the  occupier ;  the  farmer  pays  this  proportion 
(estimated  at  5  or  6  per  cent.)  since  he  must  occupy 
a  house  whether  he  pursues  farming  or  any  other 
employment. 

Owing  to  the  nature  of  the  industry  and  the 
obstacles  to  active  competition,  alterations  in  rates 
and  changes  which  affect  the  price  of  farm  produce 
are  slow  in  their  operation  upon  rents ;  the  tendency 

169  Y 


LOCAL  TAXATION  [CHAP. 

is,  however,  for  the  incidence  of  agricultural  rates  to  be 
upon  rent  in  the  long  run.  Other  things  remaining  the 
same,  if  rates  rise  rents  fall ;  and  if  rates  fall  rents  rise. 
The  application  of  this  reasoning  to  the  operation  of 
the  Agricultural  Rates  Act  (1896)  for  the  relief  of 
rates  would  lead  to  the  conclusion  that  although  the 
Act  provided  that  the  occupier  was  to  pay  only  half  the 
rates,  yet  the  action  of  economic  forces  would  sooner 
or  later  shift  the  advantage  to  the  landlord,  either  by 
causing  a  rise  or  by  checking  a  possible  fall  in  rent.1 

(2)  Ordinary  Dwelling-houses. — Here  three  interests 
appear,  those  of  the  occupier,  the  owner  of  the  building, 
and  the  ground-landlord.  The  rates  are  levied  on  the 
occupier,  and  their  burden  remains  with  him  in  so  far 
as  rates  are  general  and  uniform.  He  may  be  regarded 
as  a  consumer  of  houses  just  as  he  is  a  consumer  of 
bread  ;  both  are  prime  necessaries  in  the  demand  for 
which  there  is  but  little  elasticity,  for  a  man  must  have 
both  food  and  housing ;  speaking  generally,  a  tax  on 
either  falls  on  the  consumer,  and  therefore  the  incidence 
of  rates  on  ordinary  dwelling-houses  is  on  the  occupier. 
The  builder  or  house-owner  is  eliminated  by  the  follow- 
ing considerations  :  the  building  of  houses  is  an  invest- 
ment of  capital  which  will  on  the  average  pay  the 
ordinary  rate  of  profit,  otherwise  capital  will  flow  by 
preference  from  building  to  other  investments.  If  an 
increase  of  rates  renders  building-rents  less  profitable, 
it  will  tend  to  check  building  until  supply  and  demand 
are  readjusted ;  on  the  other  hand,  a  scarcity  of  houses 
sends  up  building-rents  and  encourages  building  until 

1  See  Prof.  Nicholson's  "  Rates  and  Taxes  as  affecting  Agricul- 
ture "  for  a  strongly-reasoned  argument  in  favour  of  further  relief 
of  agriculture  from  local  rates. 

170 


ix.]  INCIDENCE   OF   RATES 

profits  are  brought  back  to  the  normal.  Thus  rates 
cannot  in  the  long  run  be  exacted  from  the  owners  of 
houses  any  more  than  the  tax  on  beer  can  be  per- 
manently exacted  from  brewers.  Allowing  time  for 
the  play  of  economic  forces,  the  owner  of  the  building 
will  get  his  profits,  and  the  occupier  will  pay  the  rates 
on  the  value  of  the  house  as  an  article  of  common  con- 
sumption, while  the  owner  of  the  land  on  which  it 
stands,  who  receives  ground-rent,  will  pay  a  proportion 
of  rates  equivalent,  at  the  lowest,  to  its  ratable  value 
as  agricultural  land.  This  is  the  tendency  as  regards 
ordinary  houses  on  the  assumption  that  the  law  of 
competition  is  in  operation,  i.e.,  that  there  is  an 
abundance  of  land  offered  for  building  purposes  and 
that  the  land  has  no  special  monopoly-value. 

(3)  Monopoly  Site-  Value. — When  the  site  on  which 
the  building  stands  is  one  that  confers  any  special 
advantage,  either  for  residential  or  business  purposes, 
it  obtains  a  scarcity-value  which  sends  up  the  rent, 
sometimes  to  an  enormous  degree.  The  monopoly- 
value  attaches  solely  to  the  site,  and  arises  from  such 
circumstances  as  congestion  of  population,  fashion, 
special  opportunities  for  business  (as  in  the  City,  or 
Bond  Street),  or  special  advantages  of  situation  for 
health,  etc.  In  all  such  cases  the  gross  rent  (house 
and  land)  is  enormously  increased ;  but  the  element 
of  building-rent  remains  constant,  and  it  is  the  site- 
rent  that  absorbs  the  increased  value.  As  the  monopoly 
grows  the  ratable  value  rises  in  proportion  to  the  rental ; 
and  the  increased  rates,  which  are  due  to  the  monopoly- 
value,  fall  upon  the  ground-landlord,  being  a  deduction 
from  his  possible  rent.  This  will  be  seen  by  consider- 
ing an  example :  suppose  a  house  in  a  certain  situation 

171 


LOCAL   TAXATION  [CHAP. 

to  have  a  total  letting  value  of  £1000  per  annum,  of 
which  rates  absorb  .£200,  rent  of  fabric  £400,  ground- 
rent  £400 ;  let  us  imagine  that  rates  can  be  abolished  ; 
what  will  follow  ?  Will  the  rent  be  reduced  to  £800  ? 
Not  at  all ;  competition,  which  measured  the  advantages 
of  the  situation  at  .£1000  a  year,  will  continue  equally 
active,  and  the  demand  will  not  be  affected,  therefore 
offers  of  ;£iooo  will  be  made  as  before ;  but  the  interest 
on  the  capital  sunk  in  the  building  will  remain  the 
same,  since  nothing  has  happened  to  increase  building 
profits.  Thus  the  ground-landlord  will  reap  the  benefit 
arising  from  the  abolition  of  rates. 

Rates  on  a  monopoly  site  are  therefore  a  deduction 
from  the  rent  which  a  landowner  could  obtain  if  no 
such  rates  existed,  and  they  are  consequently  paid  by 
the  owner  of  the  site.  The  tenant  pays,  as  in  ordinary 
cases,  the  proportion  which  is  due  from  him  as  the 
user  or  consumer  of  the  fabric ;  the  increase  due  to 
the  site  monopoly  falls  upon  the  ground-landlord.  It 
is  true  that  special  circumstances  give  the  ground- 
landlord  an  "  unearned  increment " ;  this  raises  a 
distinct  problem,  but  rates,  in  so  far  as  they  are 
increased,  are  a  deduction  from  the  possible  increment. 

(4)  Trade  Premises  and  Shops. — In  this  case,  in  so  far 
as  rates  are  general  and  fairly  uniform,  they  are  treated 
as  a  business  expense,  and  are  shifted  upon  consumers 
in  the  price  of  goods.  If  the  situation  confers  any 
advantage  which  diminishes  competition  and  gives 
monopoly-value,  rents  will  be  higher  in  consequence, 
and  the  rates  due  to  the  higher  value  will  fall 
ultimately  upon  the  recipient  of  rent  (the  interim- 
leaseholder  or  ground-landlord).  If  the  local  rates  be 
exceptionally  high,  so  as  to  place  trade  at  a  dis- 

172 


ix.]  EQUALISATION   OF   RATES 

advantage  in  comparison  with  rival  producers,  or  if 
the  local  price  be  kept  down  by  the  competition  of 
distant  supplies  (as  from  large  town  stores),  the  local 
traders'  profit  will  suffer,  and  it  may  be  that  very 
high  local  rates  may  drive  out  an  industry  altogether.1 
This  effect  of  differential  rating  has  been  advanced  as  an 
argument  for  the  equalisation  of  rates  over  large  areas. 
Equalisation  is  desirable  in  the  case  of  adjacent  areas 
in  which  the  conditions  are  similar ;  but  it  is  inapplicable 
to  the  case  of  districts  more  remote  from  one  another  or 
in  which  the  conditions  of  production  are  dissimilar,  or 
in  which  very  different  ideas  prevail  as  to  the  character 
and  amount  of  local  expenditure. 

The  principle  of  equalisation  of  rates  seems  to  apply 
with  justice  to  areas  which  constitute  a  single  unit  for 
local  government  with  common  interests,  such  perhaps 
as  the  whole  of  the  metropolis ;  but  in  that  case  the 
authority  as  well  as  the  rating  should  be  general. 
Modern  means  of  communication  and  conditions  of 
life  tend  to  extend  these  social  units,  and  call  for 
enlargement  of  areas  ;  but  to  unite  different  districts 
merely  for  the  purpose  of  diffusing  rates  would  lead 
to  injustice  and  extravagance ;  one  locality  would  be 
taxed  for  the  waste  or  lower  efficiency  of  another. 
This  would  be  a  kind  of  protection  which  would  tend 
to  diminish  the  efficiency  of  the  superior  area. 

An  addition  to  rates,  due  to  outlay  upon  some  local 
improvement  which  takes  place  during  the  period  of 

1  The  latest  illustration  of  this  kind  of  calamity  is  the  decision 
of  Messrs  Yarrow  to  remove  their  ship-building  industry  from 
the  Thames,  one  of  the  reasons  assigned  being  that  the  heavy 
local  rates  at  Poplar  (123.  in  the  £)  render  it  impossible  for  them 
to  compete  with  the  ship-building  industries  of  the  North,  where 
also,  owing  to  the  cheaper  cost  of  living,  wages  are  lower. 

173 


LOCAL   TAXATION  [CHAP. 

his  lease  or  agreement,  falls  upon  the  occupier.  He 
cannot  shift  any  part  of  it  until  the  termination  of 
his  contract,  when  possibly  his  rent  may  be  raised  as 
a  result  of  the  increase  in  value  of  the  property,  effected 
by  the  outlay  to  which  he  has  contributed. 

The  house  -  owner  or  interim  -  landlord  gains  the 
advantage  from  the  improvement  of  the  property  for 
the  remainder  of  his  lease,  but  it  ultimately  accrues 
to  the  ground-landlord.  The  case  of  a  yearly  tenant 
is  somewhat  better.  On  the  occasion  of  a  rise  in 
rates  he  may  change  his  residence,  if  he  is  willing  to 
accept  a  house  of  lower  value ;  but  many  difficulties 
check  his  mobility — that  of  finding  a  suitable  house, 
the  expense  incidental  to  moving,  the  inconvenience 
in  change  of  address,  inertia,  trouble,  and  loss  of  time 
— so  that  the  majority  of  householders  would  probably 
submit  to  a  slight  increase  rather  than  incur  the  loss 
occasioned  by  the  alternative.  Thus  economic  friction 
tends  to  throw  part  of  a  new  or  an  increased  rate 
upon  existing  occupiers,  and  the  old  maxim  finds 
illustration  that  "  rates  tend  to  stick  where  they  fall." 
Of  course,  the  converse  is  true  that  a  reduction  of 
rates  during  a  period  of  contract  benefits  the  tenant. 
This  proposition  is,  however,  rather  an  academic  truth 
than  a  result  of  experience,  since  a  fall  in  rates  is  an 
event  of  rare  occurrence. 

The  equal  division  of  rates  between  occupier  and 
owner  has  been  advocated  for  England  and  Wales  in 
the  interest  of  equity.  The  system  already  obtains 
in  Scotland  and  Ireland.  Assuming  the  free  play  of 
economic  forces,  it  does  not  appear  from  the  previous 
analysis  of  different  cases  that  this  arrangement  as 
regards  primary  incidence  will  affect  the  ultimate 

174 


ix.]  RATING   OF   MACHINERY 

incidence  in  any  material  degree.  It  may,  however, 
remove  an  apparent  injustice,  and  thus  allay  irritation, 
and,  so  far,  it  is  worthy  of  consideration ;  but  as  a 
matter  of  economic  action  it  cannot  greatly  influence 
the  ultimate  adjustment  which  takes  place  between 
rates  and  rent.  A  lowering  of  the  occupier's  rates  by 
this  means  would  in  time  send  up  his  rent  by  the 
difference  through  the  action  on  demand  for  house- 
accommodation.  The  shifting  would,  no  doubt,  be 
slow  in  operation,  and  meanwhile,  as  an  effect  of 
economic  friction,  the  occupier  would  derive  some 
benefit.  But  it  is  more  convenient  and  economic  that 
rates  should  be  paid  in  one  sum,  and  for  sundry 
reasons  they  can  best  be  collected  from  the  occupier, 
except  in  the  case  of  cheap  tenements  where  change 
of  tenant  may  be  frequent  and  collection  difficult ; 
it  then  becomes  simpler  to  adopt  the  system  of 
composition  under  which  the  owner  pays  the  poor 
rates  on  the  whole  property,  whether  let  or  empty, 
and  obtains  a  reduction  of  some  10  to  20  per  cent. 

Rates  upon  'machinery  increase  the  cost  of  production, 
and  fall  mainly  upon  the  consumers  of  the  goods.  The 
rating  of  machinery  is  defended  on  the  ground  that 
since  local  industries  derive  great  advantage  from 
expenditure  upon  roads,  drainage,  etc.,  it  seems  reason- 
able that  they  should  contribute  to  the  cost.  The 
value  of  machinery  is,  however,  a  very  imperfect 
measure  of  these  advantages,  and  bears  no  definite 
ratio  to  the  value  of  the  local  service.  Moreover, 
machinery  is  capital  and  an  important  factor  in 
employment,  and  heavy  rates  may  inflict  serious  loss 
on  local  industries  by  placing  them  at  a  disadvantage. 
A  special  tax  upon  any  instrument  for  the  production 


LOCAL   TAXATION  [CHAP. 

of  goods  is  uneconomic,  and  tends  to  check  employ- 
ment and  production  ;  if  the  tax  be  general,  part  of  the 
burden  is  shifted  forward  and  falls  upon  the  consumer 
as  a  rise  in  price ;  this  tends  to  limit  demand,  and  thus 
a  part  is  shifted  backward  on  the-  producers ;  ultimately 
supply  and  demand  accommodate  themselves  to  the 
advanced  price.  If  the  tax  be  local,  the  industries  in 
that  locality  suffer  in  competition  with  others.  The 
attempt  to  discriminate  by  taxing  immovable  machinery 
only  is  not  very  logical ;  for  the  distinction  between 
movable  and  immovable  machinery  is  somewhat  arti- 
ficial, and  does  not  touch  the  essential  point,  viz.,  that 
both  are  capital.  A  stationary  engine  and  a  loco- 
motive are  alike  instruments  of  industry  and  means 
of  employing  labour.  Why  tax  a  dock  crane  rather 
than  a  steamship,  which  is  the  cause  of  the  crane's 
existence?  The  taxing  of  machinery  seems  to  be  a 
peculiarly  uneconomic  method  of  distributing  local 
taxation,  and  one  in  which  the  incidence  is  likely  to 
be  harmful. 

In  France,  Italy,  and  some  other  countries  a  consider- 
able part  of  local  taxation  is  raised  by  taxes  called 
octroi,  which  are  duties  levied  on  articles  of  consumption 
(food,  liquors,  fuel,  and  building  materials)  entering  the 
towns.  From  early  times  the  octroi  has  been  levied 
in  France ;  formerly  one-half  of  the  yield  was  paid  to 
the  king.  The  octroi  duty,  along  with  other  indirect 
taxes,  was  abolished  in  1791,  but  it  was  reinstituted 
in  1799  for  local  purposes.  In  Paris  the  octroi  now 
constitutes  half  the  municipal  revenue,  and  it  has  been 
widely  adopted  by  other  communes.  An  octroi  is  in 
reality  a  local  customs  duty,  inconvenient,  clumsy,  and 
costly  in  collection ;  its  incidence  is  heavy  upon  the 

176 


ix.]  OCTROIS 

poor,  since  it  is  levied  mostly  upon  necessaries ;  it 
increases  the  cost  of  living,  and  the  burden  of  the 
tax  is  not  distributed  in  any  degree  in  proportion  to 
the  benefits  gained  from  local  expenditure ;  yet,  where 
custom  has  rendered  it  familiar,  it  is  difficult  to 
substitute  a  different  system  of  taxation. 

The  octroi  system  was  formerly  employed  in  England 
to  provide  funds  for  making  roads  and  other  local 
outlay  ;  it  still  exists  in  the  form  of  coal-dues  in  a  few 
towns.1  The  London  coal-dues,  when  they  lapsed  in 
1889,  yielded  a  revenue  of  ,£450,000.  Their  history 
is  interesting;  they  originated  in  1591  as  a  tax  of  4d. 
per  ton  on  all  coal  entering  London  (then  by  sea) ; 
the  tax  was  paid  to  the  Conservators  of  the  Thames 
for  the  purpose  of  keeping  open  the  port.  An  additional 
8d.  per  ton  was  added  in  1694  to  pay  off  a  debt  of 
the  Corporation,  and  another  id.  was  added  in  1807 
to  rebuild  the  coal  exchange.  This  cumulative  tax 
of  1 3d.  per  ton  continued  to  be  collected  by 
the  City  Authorities  over  the  whole  metropolitan 
area  until  1889,  ultimately  at  some  250  points;  mean- 
while coal  entered  mainly  by  railway.  The  revenue 
was  expended  chiefly  upon  large  public  improve- 
ments such  as  the  Holborn  Viaduct  and  the  Thames 
Embankment. 

The  coal  duties  were  abolished  as  being  incapable  of 
economic  defence ;  they  raised  the  cost  of  a  necessary 

1  The  city  of  Inverness  raises  about  .£1,800  per  annum  for  local 
purposes  by  a  kind  of  octroi  on  commodities  entering  by  land  or 
by  the  Caledonian  Canal,  but  goods  coming  by  sea  and  paying 
harbour  dues  are  exempt.  The  major  part  is  raised  upon  coal, 
whisky,  and  cattle  ;  but  a  large  number  of  articles,  including  pig 
and  wrought  iron,  contribute. 

177  Z 


LOCAL   TAXATION  [CHAP. 

article  of  consumption  and  were  very  onerous,  press- 
ing especially  on  the  poor,  and  on  the  industries 
carried  on  in  London,  which  they  placed  at  a  dis- 
advantage with  competitors  elsewhere.  Further,  it  was 
urged  that  the  system  was  an  anachronism  ;  it  ignored 
the  growth  of  the  metropolis  and  of  local  govern- 
ment ;  a  body  elected  within  a  limited  district  exer- 
cised the  right  of  taxation  upon  a  necessary  of  life 
over  the  whole  metropolitan  area,  and  had  entire 
control  over  the  expenditure  of  the  duty  thus 
levied. 

Betterment. — The  great  public  improvements  effected 
in  the  metropolis  during  the  last  twenty  years  and  the 
increase  in  ground-values  which  they  have  occasioned 
have  brought  into  prominence  another  problem  of 
local  finance  under  the  name  of  Betterment.  This 
term  has  two  uses.  In  one  sense  it  refers  to  the 
fact  that  private  property  is  increased  in  value  by 
the  expenditure  of  public  money  upon  local  improve- 
ments, as  by  the  opening  of  a  new  thoroughfare. 
In  the  other  sense  it  stands  for  the  principle  that 
such  enhancement  of  value  warrants  the  imposition  of 
a  special  charge  upon  the  owners  of  property  thus 
improved ;  this  can  be  made  either  by  an  annual 
rent-charge  or  by  one  capital  sum  assessed  upon 
the  property.  In  England  the  principle  of  Better- 
ment has  been  adopted  by  the  London  County 
Council,  but  it  has  long  obtained  in  the  United  States 
under  the  title  of  "  special  assessment."  Professor 
Seligman  states  that  the  idea  was  originally  copied 
from  England  ;  after  the  Great  Fire  of  London  many 
special  improvements,  created  by  the  reconstruction  of 
the  City,  were  charged  upon  the  owners  of  property 

178 


ix.]  BETTERMENT 

benefited  thereby.1  The  American  principle  of  "  special 
assessment "  is  that,  when  any  property  has  increased 
in  market  value  by  means  of  public  expenditure 
incurred  for  purposes  of  general  utility,  the  owner  of 
the  property  can  equitably  be  required  to  contribute 
a  capital  sum  towards  that  outlay.  The  payment 
differs  from  a  local  rate  in  substituting  a  capital 
sum  once  for  all  in  quittance  for  the  improvement. 
The  "  benefit "  is  assessed  by  a  proper  authority 
upon  property  within  the  zone  of  improvement,  and 
is  based  upon  certain  accepted  tests — the  improved 
market  value,  the  extent  of  property,  the  amount  of 
frontage,  etc.  It  is  claimed  that  the  system  works 
well  by  demanding  at  once  payment  for  what  would 
otherwise  become  an  unearned  increment,  and  the 
matter  is  adjusted  promptly  and  permanently. 

The  Tower  Bridge  Act  (1895)  afforded  a  test  case 
of  the  application  of  betterment  by  the  London  County 
Council  as  an  "  annual  improvement  charge,"  but  in  this 
instance  the  expenses  involved  almost  absorbed  the 
charges  made.  Practical  difficulties  arise  in  marking  out 
the  zone  or  area  of  betterment,  and  in  estimating  and 
apportioning  the  degree  of  advantage  to  each  property 
affected.  Another  point  raised  in  the  problem  is  that 
of  "worsement,"  or  compensation  for  property  said 
to  be  injured  by  the  changes  which  produced  better- 
ment. The  claim  for  "  worsement "  is  considered  when 
it  concerns  some  other  part  of  the  same  estate,  but 
not  when  it  is  made  on  behalf  of  other  areas  or 
properties,  as  it  is  held  that  the  general  tendency 
of  public  improvements  is  to  advance  the  character 
and  economic  value  of  the  whole  district ;  the  zone 

1  See  "  Pepys'  Diary,"  3rd  December  1667,  for  a  note  to  this  effect. 

179 


LOCAL   TAXATION  [CHAP. 

of  beneficial  influence  extends,  like  the  ripples  caused 
by  dropping  a  stone  into  a  pool,  until  gradually 
the  whole  area  is  affected.  While,  therefore,  some 
properties  may  suffer  temporary  loss  from  a  large 
public  reconstructive  operation,  they  ultimately  gain 
from  the  permanent  advantage  conferred  upon  the 
whole  locality  by  the  improvement.  Sometimes  the 
practical  difficulties  in  the  application  of  the  better- 
ment principle  are  avoided  by  the  adoption  of 
the  alternative  principle  of  "  recoupment " ;  by  this 
is  meant  that  the  local  authority  acquires  by 
purchase  a  large  area  in  the  district  that  is  to  be 
improved,  and  recovers  in  the  improved  value  of 
this  area  the  whole  or  the  greater  part  of  the  cost 
of  the  scheme.  The  local  authority  can,  after  the 
improvement,  resell  the  estate  at  the  improved  value, 
or,  what  is  thought  better,  can  retain  the  sites  and 
let  them  on  building  leases  for  periods  of  time,  thus 
securing  the  betterment  value  in  ground-rents.  Of 
course  there  is  in  this  method  a  speculative  element. 
This  principle  has  been  adopted  by  the  London  County 
Council  in  the  case  of  the  extensive  Strand  improve- 
ments. And  it  is  contended  that  when  the  estimated 
ground-rents  of  the  future  are  compared  with  the  interest 
value  of  the  money  borrowed  for  the  purposes  of  the 
scheme,  and  when  the  benefit  to  the  Council  arising 
from  letting  the  surplus  property  on  terminable  building 
leases  with  reversionary  interest  to  the  Council  is  also 
considered,  it  will  be  found  that  this  scheme  will  ulti- 
mately be  profitable  to  the  community.1 

1  Extract  from  letter  of  Mr  G.  F.  Shaw  Lefevre  to  The  Times, 
2Qth  April  1905  : 

"  The  cost  of  acquiring  this  great  property,  and  of  rehousing  in  the 

1 80 


ix.]  TAXATION   OF   SITE-VALUES 

Should  the  Strand  experiment  justify  these  anticipa- 
tions, there  will  probably  be  a  considerable  application 
of  the  recoupment  principle  in  urban  improvements. 

The  alarming  growth  of  local  taxation  in  recent  years 
and  the  simultaneous  extensive  increase  in  the  value 
of  town  lands,  which  becomes  apparent  whenever  any 
sale  of  building  land  takes  place,  as  well  as  in  the  rise  of 
rents,  have  drawn  public  attention  to  the  subject  of  the 
monopoly  of  town  lands  and  have  given  rise  to  several 
movements  for  easing  the  burden  of  local  taxation. 
One  of  these  is  an  agitation  for  the  taxation  of  ground- 
or  site-values  as  a  source  of  public  revenue.  The  aim 
is,  by  some  form  of  taxation  on  building  sites,  whether 
occupied  or  vacant,  to  appropriate  the  "  unearned 
increment "  of  land,  more  particularly  in  urban  districts 
where  the  increase  in  permanent  value  is  very  obvious 
in  the  growth  of  rents.  It  is  argued  that  this  increase 
in  value  is  not  due  to  the  outlay  or  enterprise  of  the 
owner,  but  largely  to  society  and  to  public  expendi- 
ture upon  roads,  sanitation,  open  spaces,  etc. ;  and  that 
it  can  therefore  equitably  be  appropriated  for  public 

neighbourhood  3,800  persons  of  the  labouring  class  dispossessed 
by  it,  was  estimated  at  .£4,893,000.  The  value  of  the  area  of 
recoupment  was  estimated  in  the  usual  way,  by  taking  the  selling 
market  value  of  the  ground-rents  for  which  the  surplus  land  was 
expected  to  let,  at  ,£4,164,000,  and  the  net  cost  of  the  scheme  thus 
arrived  at  was  put  at  £745,000,  irrespective  of  any  loss  resulting 
from  the  interval  between  the  purchase  of  the  property  and  the 
letting  of  it  on  lease,  which  in  any  case  would  necessarily  be  of  con- 
siderable amount. 

"  But  the  Council  is  not  bound  to  sell  its  ground-rents.  It  is 
allowed  to  hold  them  as  security  for  its  sinking  fund.  I  held  that 
the  true  measure  of  the  cost  of  such  a  scheme  was  the  difference 
between  the  estimated  ground-rents  and  the  interest  of  the  money 
borrowed  for  the  purpose  of  the  scheme." 

Itl 


LOCAL  TAXATION  [CHAP. 

use.  Unquestionably  the  high  monopoly-value  of 
certain  land  is  due  to  the  growth  of  population  and 
its  aggregation  in  towns,  to  the  concentration  of  com- 
mercial activity  and  capital,  and  to  the  social  wealth 
and  productive  energy  compressed  into  limited  areas. 
On  what  principle  can  the  State  appropriate  a  share  of 
this  enormous  wealth,  which  tends  to  almost  limitless 
expansion  without  any  special  effort  on  the  part  of 
the  owner  ?  The  problem  has  frequently  been  raised  ; 
it  was  unsuccessfully  attacked  by  J.  S.  Mill,  and 
subsequently  revived  by  the  advocates  of  the  single 
tax.  The  question  is  much  too  intricate  and  vast 
for  present  discussion,  and  its  full  examination  is  not 
wholly  appropriate  to  the  task  in  hand,  but  a  few 
of  the  difficulties  may  be  stated. 

The  chief  argument  for  special  taxation  of  land 
values  is  that  there  exists  a  great  distinction  between 
land  monopoly  and  other  monopolies,  in  that  land  is 
the  fundamental  factor  in  all  production,  the  prime 
necessary  for  existence,  and  is  strictly  limited  in 
amount.  To  this  it  is  replied  that  private  ownership 
of  land  was  found  expedient  for  its  development,  that 
this  principle  is  the  active  stimulus  in  the  settlement  of 
new  countries,  and  is  also  the  chief  cause  of  successful 
agriculture  in  old  countries.  Also  it  is  urged  that  if 
rents  have  increased  rates  have  increased  in  the  same 
proportion,  and  that  this  increase  of  rates  falls  upon 
the  ground-landlord.  And  it  is  asked,  how  can  it 
be  determined  what  part  of  the  increase  in  land-values 
is  due  to  outlay,  foresight,  and  management  on  the 
part  of  owners,  and  what  to  other  causes  ?  Further,  it  is 
often  stated  that  the  rent  of  much  agricultural  land  pays 
a  very  small  percentage  on  the  capital  which  has  been 

182 


ix.]     TAXATION  OF  GROUND  VALUES 

sunk  in  it  by  the  owners.  Urban  land  also  changes 
hands  frequently  by  sale,  and  on  each  occasion  the 
purchasers  pay  the  full  capital  value  for  the  increments 
to  rent  in  the  price.  Appropriation  of  the  increment  in 
such  cases  would  be  simply  confiscation.  How  are  these 
various  objections  to  be  dealt  with  ?  Mill  suggested  that 
a  general  valuation  should  be  made,  and  that  the  appro- 
priation of  the  increments  should  take  place  from  some 
fixed  future  date ;  this,  however,  would  only  postpone 
the  difficulty.  The  present  proposal  is  that  a  valuation 
of  sites  be  made  for  the  purpose  of  special  rating.  It  is 
difficult  to  see,  however,  on  what  basis  this  can  be  made 
other  than  by  reference  to  the  rents  they  fetch,  or  how 
the  site  taxation  will  be  carried  out  so  as  not  to  confis- 
cate capital  values  for  which  the  full  price  has  been 
paid  at  purchase. 

Again,  it  is  pointed  out  that  land  is  only  one  instance 
out  of  many  of  the  forms  of  unearned  increment ; 
that  all  profitable  stock  exchange  transactions  and 
all  cases  of  increase  in  values  of  investments  are  of 
this  class,  while  of  the  same  kind  are  all  business 
speculations  from  which  more  than  average  profit 
is  derived.  In  every  walk  of  life  there  are  some 
individuals  who  earn  more  than  their  fellows  by  "  mere 
good  fortune,"  due  to  extraneous  circumstances  and  in 
no  sense  to  their  own  efforts  or  ability.  A  further 
difficulty  is  the  treatment  of  decrements :  how  are 
they  to  be  dealt  with  ?  Does  the  principle  of  equity 
allow  increments  to  be  taken  and  decrements  to  be 
ignored  ?  Again,  in  all  cases  of  property  there  are 
many  interests  at  stake,  and  numerous  legal  obligations 
have  been  incurred.  On  analysis  the  subject  seems  to 
bristle  with  difficulties  and  complications,  the  equitable 

183 


LOCAL   TAXATION  [CHAP.  ix. 

solution  of  which  will  demand  great  trouble,  time,  and 
expense.  Meanwhile  the  problem  presses  urgently  for 
some  solution.  The  enormous  rise  in  value  of  town 
sites  and  suburban  land  goes  on  concurrently  with  the 
increase  of  rates  and  local  indebtedness.  The  burdens 
of  rate-payers  in  the  ever-expanding  towns  are  constantly 
growing,  and  from  the  same  cause  problems  of  poverty, 
of  wages,  rent,  housing,  and  the  migration  of  industries 
are  becoming  more  serious.  Several  Royal  Commissions 
have  made  enquiries  and  reports  upon  the  subject,  which 
constitutes  at  present  the  most  pressing  and  difficult  of 
social  problems.1  It  is  essential  that  some  equitable 
method  should  be  devised  which  will  enable  the  com- 
munity to  defray  the  expenditure  incident  to  its  own 
development  from  the  increase  in  the  values  which 
are  created  thereby.  But  before  the  burden  of  local 
taxation  can  be  redistributed  by  taxation  of  site-values 
the  difficulties  here  described  must  be  resolved,  and  a 
working  scheme  propounded,  which  will  deal  equitably 
with  the  many  interests  involved. 

The  economic  effect  of  a  tax  on  ground  -  values 
(supposing  it  capable  of  being  imposed  equitably  on 
the  differential  monopoly-value  only)  would  be  almost 
entirely  upon  rent  -  owners ;  it  could  not  be  shifted, 
except  to  a  small  extent  indirectly.  If  the  tax  were 
such  as  to  diminish  in  any  degree  the  supply  of  land  for 
building  purposes  some  part  of  the  tax  would  be  shifted 
to  occupiers  by  a  rise  in  rent,  as  a  consequence  of  a 
relative  scarcity  of  dwelling  -  houses ;  the  major  part 
would,  however,  always  remain  with  the  rent-receiver. 

1  For  a  very  lucid  account  of  the  present  position  and  the  pro- 
posed methods  of  taxing  sites,  see  "  Rating  of  Land  Values,"  by 
A.  Wilson  Fox. 

184 


EXTRACT  FROM  REPORT  OF  ROYAL  COMMISSION 
ON  LOCAL  TAXATION;  BEING  THE  SUMMARY 
OF  THE  SEPARATE  REPORT  ON  URBAN  RATING 
AND  SITE -VALUES  SIGNED  BY  FIVE  COM- 
MISSIONERS. 

IT  may  be  convenient  that  we  should  here  briefly  summarise  the 
conclusions  which  we  have  formed  on  the  question  of  Urban 
Rating,  and  to  which  we  desire  to  call  special  attention.  They 
are  as  follows  : — 

(1)  That  misconception  and  exaggeration  are  specially  prevalent 

on  this  subject. 

(2)  That,  as  a  rule,  others  besides  the  freeholder  are  interested 

in  site-values. 

(3)  That  the  value  of  the  site  as  well  as  of  the  structure  is  at 

present  assessed  to  rates. 

(4)  That,  while  site-value  is  enhanced  automatically  by  extraneous 

causes,  yet  it  has  no  monopoly  of  such  enhancement ;  but 
that  the  outlay  of  ratepayers'  money  does  increase  the  value 
of  urban  sites  to  a  special,  though  not  easily  measurable, 
extent. 

(5)  That  site  and  structure,  which  are  now  combined  for  rating 

purposes,  differ  so  essentially  in  character  that  they  ought 
to  be  separately  valued. 

(6)  That,  when  separated  from  structure,  site-value  is  capable  of 

bearing  somewhat  heavier  taxation,  and  should  be  made 
to  bear  it,  subject,  however,  to  strict  respect  for  existing 
contracts. 

(7)  That  the  differential  treatment  should  take  the  form  of  a 

special    site-value    rate,   payable    in    part    by  means  of 
185  2  A 


REPORT  OF  ROYAL  COMMISSION 

deduction  from  rent  on  the  Income  Tax  method,  and 
that  thus  a  part  of  the  burden  should  visibly  fall  on  those 
who  have  interests  superior  to  those  of  the  occupier. 

(8)  That,  subject   to  the  conditions  which  we  have  specified, 

the  special  site-value  rate  should  be  charged  in  respect 
of  unoccupied  property  and  uncovered  land. 

(9)  That,  if  proper  regard  be  had  to  equitable  considerations, 

the  amount  capable  of  being  raised  by  a  special  site-value 
rate  will  not  be  large  ;  and  that  the  proceeds  of  it,  what- 
ever the  amount  may  be,  should  go  in  relief  of  local,  not 
Imperial,  taxation. 

(10)  That  it  may  be  well  to  apply  the  scheme  on  the  principle 

of  "local  option,"  and  to  limit  the  immediate  introduction 
of  it  to  urban  places,  having  a  population  in  excess  of  a 
given  number,  and  of  a  given  density. 

The  advantages  which  can   be  claimed  for  the  proposal  are, 
we  venture  to  think,  not  inconsiderable. 

(1)  It  would  conduce  to  placing  the  urban  rating  system  on  a 

more  equitable  and  thus  sounder,  basis. 

(2)  It  would  be  making  the  ground-owner,  and  others  who  may 

under  the  leasehold  system  acquire  an  interest  in  site- 
values,  contribute  somewhat  more  to  local  taxation  than 
they  do  now,  and  the  contribution  would  be  direct  and 
visible. 

(3)  It  should  go  some  way  towards  putting  an  end  to  agitation 

for  unjust  and  confiscatory  measures. 

(4)  It  would  enable  deductions  for  repairs  to  be  made  solely  in 

respect  of  the  buildings. 

(5)  It  would  do  something  towards  lightening  the  burdens  in 

respect  of  building,  and  thus  something  towards  solving 
the  difficult  and  urgent  housing  problem. 

(6)  It  would  tend  to  rectify  inequalities  between  one  district 

and  another  district,  and  between  one  ground-owner  and 
another  ground-owner. 

(7)  It  would,  or  at  least  it  should,  conduce  to  the  removal  of 

some  of  the  widely-spread  misconceptions  which  seem  to 
prevail,  not  only  in  political  circles,  but  among  economic 
authorities  and  responsible  statesmen  ;  for,  while  it  would 
be  an  admission  that  there  were  defects  in  the  urban 
rating  system  and  an  attempt  to  remedy  those  defects, 
it  would  show  that  there  is  no  large  undeveloped  source 
1 86 


REPORT  OF  ROYAL  COMMISSION 

of  taxation   available   for   local   purposes,   and   still  less 
for  national  purposes. 

We  would  point  out  that,  if  a  moderate  proposal  to  effect  these 
objects  is  ever  to  be  made,  it  would  be  specially  opportune  to 
make  it  at  a  time  when,  under  the  schemes  which  we  are  putting 
forward,  the  burden  of  rates  in  towns  will  be  appreciably  relieved. 
By  making  use  of  this  opportunity,  it  will  be  possible  to  introduce 
a  sound  and  advantageous  principle  into  our  local  taxation  without 
disappointing  legitimate  expectations.  More  especially,  since  any- 
thing that  tends  to  relieve  the  pressure  of  local  taxation,  or  to 
prevent  the  growth  of  it,  must  ultimately,  sooner  or  later,  benefit 
the  owners  of  site-values,  it  seems  desirable  that  any  increased 
provision  made  by  the  State  in  aid  of  services  locally  administered 
shall  be  accompanied  with  some  make-weight  in  the  shape  of  an 
owner's  site-value  rate. 


187 


LOCAL    TAXATION,    1902-03 


RECEIPTS 


From  Rates      .... 

„     Water  undertakings 

„     Gas  undertakings    . 

„     Electric  Light  undertakings  . 

,,  Repayments  on  account  of 
Private  Improvements  exe- 
cuted by  Local  Authorities 

,,     Tramways       . 

„     Government  Contributions 

„     Tolls,  Dues,  and  Duties 

„     Rents,  Interest,  etc. 

„     Sales  of  Property    . 

„  Fees,  Fines,  Penalties  and 
Licences  . 

„     Loans      

„     Miscellaneous 

TOTAL  RECEIPTS 


England  and  Wales 
£50,328,412 
4,l84,6ll 
7,168,705 
I,88l,265 


1,850,845 

3,797,758 

12,782,803 

4,127,130 

2,412,144 

473,035 

988,266 

35,271,367 

3,940,443 


United  Kingdom 


£76,450,000 


4,643,000 

16,246,000 

5,568,000 

2,852,000 

662,OOO 

1,236,000 

39,774,000 
4,860,000 


£129,206,784    £152,291,000 


EXPENDITURE 


Relief  to  Poor  .... 

Other  payments  from  Poor  Rates  . 
From  Loans  ..... 
Parish  Councils  and  Meetings  . 
Under  Burial  Acts  .... 
School  Boards  .... 

Town  and  Municipal  Authorities  for 

Police,  Sanitary,  and  other  Public 

Works  ...... 

Rural  District  Councils  .  .  . 
County  Authorities  for  Police  and 

Lunatic  Asylums  .  .  . 

Highway  Boards  and  Road  Trustees 
Turnpike  Trusts,  Bridges  and 

Ferries  ...... 

Drainage  and  Embankment  .  . 
Church  and  Ecclesiastical  Rates  . 
Harbour  Authorities  .  .  . 
Other  Authorities 


TOTAL 


£13,609,870  £15,992,000 

i,737,798|  ,,18000 

2,i65,278/  4,318,000 

188,719  685,000 

667,376  670,000 

13,488,433  16,274,000 


79,995,031 

i,799,632>. 

91,830,000 

7,735,530  1 
2,  1  83,270  | 

15,062,000 

1,469' 
434,801 

489,000 
58,000 
6,551,000 
236,000 

4,819,498 
142,038 

£152,165,000 


BOOKS   OF   REFERENCE 

BASTABLE,  Prof. ....     Public  Finance. 

BLUNDEN,  G.  H.      ...     Local  Taxation  and  Finance,  1895. 

BUXTON,  SYDNEY    .    .    .    Finance  and  Politics. 

CANAAN,  E History  of  Local  Rates  in  England, 

1896. 

DOWELL,  STEPHEN      .    .     History  of  Taxation  and  Taxes    in 

England,  4  vols. 

ELY,  Prof. Taxation  in  American  States  and  Cities. 

EDGEWORTH,  Prof.      .     .     Pure  Theory  of  Taxation  in  Economic 

Journal,  iv.  pp.  46  and  226. 

GIFFEN,  Sir  R Essays  on  Finance,  2  vols. 

GOSCHEN,  Lord  ....     Report  on  Local  Taxation,  1870. 

HOBHOUSE  &  WRIGHT    .     Local  Government  and  Local  Taxa- 
tion, 1894. 

LEROY-BEAULIEU    .    .    .     Science  des  Finances. 

M'CULLOCH,  J.  R.   .     .     .     Taxation  and  the  Funding  System. 

MILL,  J.  S Principles  of  Political  Economy. 

NICHOLSON,  Prof.    .     .     .     Political  Economy,  vol.  iii. 

„  „       .     Rates  and   Taxes   as  affecting  Agri- 

culture. 

PLEHN,  Prof. Introduction  to  Public  Finance. 

RICARDO,  D Principles  of  Political  Economy  and 

Taxation. 

SMITH,  ADAM     ....    The  Wealth  of  Nations. 

SELIGMAN,  Prof.      .    .    .    Essays  on  Taxation. 

„  „          ...     Shifting  and  Incidence  of  Taxation. 

„  „          ...     Progressive  Taxation. 

WILSON  Fox,  A.     ...     Rating  of  Land  Values. 

Encyclopaedia  Britannica,  Various  Articles. 
Dictionary  of  Political  Economy  (Palgrave),  Various  Articles. 

191 


REPORTS 


REPORTS 

Town  Holdings  Committee,  1892. 

Classification  and  Incidence  of  Imperial  and  Local  Taxes,  1899. 

Final  Report  of  Local  Taxation  Committee,  1901. 

Local  Taxation  Returns,  Annual,  1905  (for  years  1902-3). 

Reports  on  Graduated  Income  Taxes  in  Foreign  States,  1905. 

Graduated  Income  Tax  (Colonies). 

East  India— Accounts  and  Estimates. 

Views  of  Government  of  India  on  Preferential  Tariffs. 

Diplomatic  and  Consular  Reports  (Foreign  Office). 

Finance  Accounts  of  the  United  Kingdom. 


192 


INDEX 


ABILITY,  as  the  measure  of  taxa- 
tion, 31,  48,  161 

Account  Duty,  69 

Agricultural  land,  rates  on,  169 
—  Rates  Act,  165,  170 

Aids,  21,  56 

Area  of  taxation,  1 1 1 

Assessment,  monthly,  58 ;  special, 
179 

Australia,  income-tax,  68  ;  tariff,  87 

Austria,  21 

BASTABLE,  Prof.,  3,  72 
Beneficial  taxation,  16 
Bentham,  48 
Betterment,  78 
Bowes,  John,  57 
Budget,  1 8,  135 

CANADA,  69 

Cannan,  E.,  103 

Canons  of  taxation,  42-50 

Capital,  taxes  on,  116 

Certainty,  canon  of,  43 

Civil  List,  1 8,  59,  101 

Classification,  of  functions  of  govern- 
ment, 7  ;  of  taxes,  40 

Coal  dues,  177 

Colbert,  36 

Colonies,  87 

Commodities,  taxes  on,  76-88 

Consolidated  Fund,  18,  59 

Consumption,  taxation  on,  40,  50 

Convenience,  canon  of,  44 

Corn  Laws,  29,  80,  84 

County  Council,  London,  180 

Crown  revenue,  58,  59  >  lands,  101 

Customs,  union,  42,  86  ;  duties,  78- 
90;  India,  147;  France,  154; 
Local,  162 


DANEGELD,  56 

Death  Duties,  69,  136 

Debt,    National,    20 ;    Local,    138 ; 

Indian,  149;  French,  152 
Degressive  Taxation,  53 
Demesne,  21,  56;  French,  157 
Diffusion  Theory,  106 
Direct  taxation,  36,  54-74  ;  France, 

153 
Dwelling-houses,  rates  on,  1 70 


ECONOMY,  canon  of,  47 

Edgeworth,  Prof.,  48 

Education,  4  ;  taxation  for,  1 5 

Estate  Duty,  70-72 

Evolution  of  taxation,  23,  32 

Expediency,  9,  17 

Expenditure,  State,  I,  3  ;  table  of, 
20  ;  imperial  and  local,  4,  9  ;  pro- 
ductive, 10;  defects  of,  12  ;  Indian, 
144 ;  French,  152  ;  local,  160 

Excise,  58,  90  ;  Indian,  147 

Export  Duty,  87-90 

Equalisation  of  rates,  173 

Equity,  canon  of,  47 


FARMING  of  taxes,  45,  59 

Feudalism,  8 

Finance,  Public,  nature  of,  2,  3 ; 
Accounts,  20  ;  Act,  61 

Fifteenths  and  tenths,  57 

Fiscal  system,  23;  France,  151 

Floating  Debt,  126 

Forests,  revenue,  22  ;  Indian,  145 

France,  income-tax,  67  ;  debt,  124  ; 
fiscal  system,  151-158  ;  local  taxa- 
tion, 176 

Free  Trade,  85 

193  2  B 


INDEX 


GABELLE.  45 

Gladstone,  W.  E.,  42,  64,  81,95,  r36 

Goschen,  Lord,  163 

Graduated  taxation,  51 

Grants-in-aid,  164 

Ground- values,  taxation  of,  184 

HEARTH-TAX,  56,  59,  73 
Hicks-Beach,  Sir  M.,  46  note 
Holland,  58,  90,  95 
House  Duty,  73-75,  163 
Hume,  David,  131 
Huskisson,  80 

IMPORT  Duties,  80,  87 

Incidence  of  taxation,   103-119;  of 

rates,  167-172 
Income  -  tax,    34,    39,    49,    63  -  68  ; 

India,  146  ;  local,  161 
India,  8,  land  revenue,  22 ;  opium, 

89  ;  tax  system,  142 
Indirect  taxation,  37,  76,  155 
Irrigation,  148 

JEVONS,  W.  S.,  note,  35,  83 
Justice,  maintenance  of,   7,  13 

LAISSER  FAIRE,  6,  7 
Land-tax,  59-63  ;  Indian,  144 
Legacy  Duty,  69,  70-72 
Lewis,  Sir  G.  C.,  36 
Licences,  77,  91 

Loans,  124,  128,  132  ;  local,  137 
Local  government,  5 
Local  taxation,  20,  159 

MACHINERY,  rates  on,  175 
Mercantile  system,  6,  179 
Military  expenditure,  1 1 
Mill,  J.  S.,  7,  21,  38,  47,  48,  74,  96, 

182 
Monopoly,  22,  23,  78,  109  ;  France, 

157;  rates  on  value,  171;  land,  182 
Montesquieu,  25 
Movables,  57 

NATIONAL  Debt,  62,  120-140 
National  defence,  13 
Natural  liberty,  6 
Navigation  Acts,  81 
Net  produit,  33 


OCCUPATIONS,  taxes  on,  91 
Octroi,  158,  162,  176 
Onerous  taxation,  163,  166 
Opium  revenue,  23,  145 
Optional,  functions,  7>  16 
Ownership,  taxes  on,  76 

PEASANTS'  REVOLT,  57 

Peel,  Sir  R.,  42,  64,  80 

Physiocrats,  6,  33 

Pitt,  42,  60,  63,  80,  133,  135 

Poll-tax,  57,  58  . 

Poor,  relief  of,  14  ;  Law,  14,  160 

Post  Office,  99  ;  Indian,  148 

Productivity,  limits  of,  92 

Probate  Duty,  69 

Profits,  taxes  on,  1 16 

Progressive  taxation,  52 

Property-tax,  69,  118,  119 

Proportional  taxation,  51 

Protective  tax,  28,  84 

Prussia,  railways,  23  ;    income-tax, 

66,  68 
Public  control,  18 

QUID  PRO  QUO  theory,  24,  160 

RAILWAY  Duty,  91,  97 ;  State, 
India,  148;  France,  156 

Rates,  159-184 

Realised  wealth,  taxation  of,  51 

Recoupment,  180 

Registration,  94  ;  French,  154 

Rent,  taxes  on,  116 

Retaliation,  86  note 

Revenue,  Tables,  20 ;  sources  of, 
21-24;  Inland,  91  ;  Indian,  142; 
French,  153 

Ricardo,  D.,  26,  48,  136 

SALES,  taxes  on,  96 
Salt-tax,  146,  156 
Seligman,  Prof.,  178 
Shifting  of  incidence,  104 
Ship-money,  56 
Shops,  rates  on,  172 
Site-values,  taxes  on,  171,  180 
Smith,  Adam,  2,  4,  6,  7,  16,  21,  26, 

31,  42,  54,  83,  131 
Social  Dividend,  24 
Socialism,  6,  7  ;  taxation,  30 


194 


INDEX 


Stamp  Act,  69,  95  ;  Duties,  94-97  ; 

India,  146;  France,  154 
State  production,  12 

intervention,  9 

Subsidies,  57 

Subventions,  164 

Succession  Duty,  69 

Suez  Canal,  101 

Sugar  Duty,  82;  French,  156 

Sumptuary  laws  and  taxes,  30 

TAILLE,  43 

Tariffs,  86 

Taxation :  taxes,  definition,  1,4; 
effect,  13  ;  single,  33  ;  theories, 
24-32  ;  self,  24 ;  Bankers,  59  ; 
good  investment,  26 ;  for  revenue, 
28 ;  a  stimulus,  28 ;  historic 
growth,  41  ;  canons  of,  42  ;  minor 
rules  of,  54  ;  graduated,  51 ;  local, 
159 ;  sites,  181 


Telegraphs,  191 
Terminable  Annuities,  127 
Tobacco  monopoly,  22 
Tolls,  77 

Trade  premises,  taxes  on,  172 
Transfer,  taxes  on,  94 
Transit  Duties,  98 

UNEARNED  increment,  101 
Unfunded  debt,  126 
United  States,  66,  67,  86 

WAGES,  taxes  on,  114 
Walpole,  Sir  R.,  90,  136 
Window-tax,  69,  73 

YOUNG,  ARTHUR,  35 
ZOLLVEREIN,  42,  86 


195 


PRINTED   AT  THE   EDINBURGH   PRESS 
9   AND   11    YOUNG  STREET. 


University  of  California 

SOUTHERN  REGIONAL  LIBRARY  FACILITY 

405  Hilgard  Avenue,  Los  Angeles,  CA  90024-1388 

Return  this  material  to  the  library 

from  which  it  was  borrowed. 


"RO  IL- 
DEC  05  1992 


A    000681  615 1     i 


